Evolution: -- Francis Edgeworth of great britian introduced the concept of “ indifference curve” for the first time in 1881.then atalian economist parato presented this theory with some modifications.finaly J.R.Hicks and R.G.D.Allen has completed this theory in 1930.
This theory is known by a variety of its names as it is called
Neo-classical theory’ of consumers behavior’ --------Hicksian
theory of consumers behavior’
“Optimal choice theory” -------------and—indifference curve theory
The basic idea of IC.
basic idea behind indifference curve theory is as &
i. Consumer retains a number’ of pairs of two goods in his brain
which provide him equal more or less satisfaction’. (an individual is able to
rank them in order of preference)
ii. utility can be ranked qualitatively (so, this approach is known
as ordinal approach).
Aim of IC theory.the
aim of this theory is solve the problem of consumer as &
i. to clarify how consumer purchasing pattern can interrelate with
his given amount of money and with the
given prices of all goods he might consume.
ii. to see what can be said about the nature of the equilibrium
position.
iii. to predict the effect-----on his equilibrium ------ of the
changes of prices, income, taste.
Assumption.
1:-- Rationality
of consumer: --- he is well
informed about the prices of market, about his income’, and about his preferences’,
so in this situation he desires to maximize his satisfaction.
2:--Ranking of the
utility:---the consumer is
able to rank the various bundle in order of preferences so that he knows which give him
equal;, more or less satisfaction.
3:--Two
Commodity Model: --- as ----------------------U=f(x,y) there is two commodities
---------------------- “X and Y”---------------------
4:--Good Are
Divisible: --- Therefore, in
the combination of two goods, a consumer can-also hold half and quarter units’
of the two good’s.
5:--prefrence
and disprefrence: --- a consumer has
a clear view about that .he does not wish to get the combination of “
airpollution and the noise” for this he shows disprefrence.
5:-- Axiom of
consistency: --- it mean if in one
period he prefers “A” combination to “B” in other period he will not prefer “B”
to “A”
6:--Reflexivness:
--- any combination like “A” is indifferent in it self.
6:-- Axiom of
dominance: --- this assumption
states that a consumer
Prefers --------------. ----------------More to less-------------
Explain consumer equilibrium by ordinal approach
Or with the help of indifference curve. Or neo classical approach
According to the ordinal approach
“when the budget line is tangent to the highest possible indifference curve, then
the consumer is in equili-brium.
Now first of all we define 1.
What is indifference curve?
Then we see about the 2. Budget line
And at last 3. We combine both of
them and get the equilibrium of consumer.
Indifference
curve:--
Indifference:
--- mean here regards the combination of two goods equally desirable
Definations:
-------------------------&
i) --- A curve showing a series of “bundle” of two
goods so that consumer remain indifferent Among them “is indifference curve.
ii) --- A curve’ which indicates differing
combination of 2 goods like x and y which give a consumer ------ an equal-level
of satisfication -------- is indifference curve.
iii) --- an indifference curve is
the locus of all points in the commodity space that are equally attracted to
the consumer.
Example --- “ we can say an indifference is equal to basket of roses”.every
combination of two goods at the “same indifference” curve ii like as a
combination of two roses from the basket which give the same smell to the
person.
Becoz two goods are used in IC
approach therefore ------ U = f(X,Y)
Now we construct indifference curve
with the help of schedule and diagram.
|
Bundle |
Commodity (x) |
Commodity (y) |
Satisfaction |
|
A B C D E |
1 2 3 4 5 |
11 8 6 5 4 |
Constant Constant Constant Constant Constant |
Explanation.
With the help of scheduled we draw
an IC which shows the different combination of twoGoods X and Y give the same
satisfaction.
Indifference
curve map: ---
The curve IC concerned with the
pairs providing Equal satisfication at the same IC
But sometime more or less
satisfication can lies
n This is shown in the IC map
In this map IC1 shows the preferred
combination
Than IC0---- hence IC0 shows the
lower level of satisfication.
Budget line: ----: an indifference
curve indicates differing combination of 2 goods’ x and y which yield an equal-level
of satisfaction. Now the question is this which combination of two goods --- a
consumer can afford.this is concerned with the budget line, price line or
budget constraint. It is define as----------&
Definition: ------- budget-line is a curve which indicates differing
combination of 2 good’s like x and y which a consumer can buy, --- while the
consumer,s income’.prices of x and y are specified” it is as’ --------- Xpx+ Ypy=1
X and Y are goods, px, py are the
prices’ of X and Y and I= income
Explanation: ------ suppose a consumer has income = 10 px=2 and py=1
i:------- if he spend all his money
on good x he can purchase 5 units ---- as Y/PX.
10/2=5.
ii:------- if he spend all his money
on good y he can purchase 10 units ---- asY/PY.
10/1=10.
Note: ---- this is his budget constraint—maximum 5 of x and 10 of y he
can purchases,under this line all combination of two goods are attainable, as
shown in the schedule-------
|
Pairs |
x |
y |
Xpx + xpy =1 |
|
A. B. C. D. E. F. |
0 1 2 3 4 5 |
10 8 6 4 2 0 |
0(2) + 1(10) =10 1(2) + 8(1) =10 2(2) + 6(1) =10 3(2) + 4(1) =10 4(2) + 2(1) =10 5(2) + 0(1) =10 |
Ploting these values in the diagram
we get the budget line -----------AF
under this all pairs of x and
y are Attainable, and where the income Of consumer is fully spent on the pair’s--------A,
.B, .C, .D, .E, .F.
Budget-line Properties:
-----
1:------ the budget line is the
locus of all combination of X and Y that satisfy,s the equation’ ------------ xpx+ypy
= income
2:------ the budget line divides the
entire commodity space into the attainable--------- and ------unattainable
pairs.
the existence of the unattainable set
reflects the influence of the law of scarcity.
Scarcity: ----- (a situation in which the amount of something available is
insufficient to satisfy the human wants.
3:----the Absolute-Slope of budget
linen equal’ to the ratio of commodity prices as & budget line slope = .Y/
.X= .px/py. 2/1 =
2/1 . 2=2
4:----slope almost is equa to the
number of units of Y-----that the
consumer gives up
for getting an extra unit of x
5:----the budget line depends upon
only two elements i: ------- an income
ii:------ prices of commodity (x and y)
when either of these elements
changes, budget line shifts to a new position.
Note. ----- it remain unaffected in
the case of proportional change in income and prices.
Consumer Equilibrium ------ Maximization of Ordinal Utility.
Earlier we discussed IC curve -------- “ a curve that shows the bundle of
two goods which give the same satisfication to consumer”
----------------------------------------------and--------------------------------------------------
budget line “ a straight line that contain different bundle of 2 good’s X and Y
which----------a consumer’ can afford’.
Now the question rises
which combination’ of X and Y----a consumer’ actually purchases. Very simple
answer of this problem------, consumer will purchase such a bundle of goods
where his --------utility is maximized, and also he is said to be in
equilibrium.
Here we now discuss the equilibrium
technicallyand according the ordinal approach.
1):.
----- “the consumer is in equilibrium when the budget line is tangent
to the highest possible indifference curve”
ii):. ------ a consumer’ is in equili-brium when
following two condition will fulfilled.
a):. –when the absolute slope of budget line
(which shows the price ratios of two commodity as the ----px/py -----and IC slope
(which shows MRSxy=dy/dx) are equal.
Dy/Dx= py/px
(necessary condition for equilibrium)
b):. --------at equilibrium the IC must be convx
to the origin.(sufficient condition)
explanation:----------- in this
diagram .we have indifference curve map consisting of three IC,S while the
budget line is “AF”
We know that a consumer has two
option now,
Either he wants to maximize his satisfaction, r he wants to minimize
his cost
In
the diagram both are explained.
i):* --- a consumer cannot attain
the equilibrium on IC3 becoz it is above the range.
ii):*the consumer again not get the
equilibrium on IC1 becoz it gives him less satisfaction
ii:*- accordingly the consumer get
equilibrium onIC2 becoz there both (ICand BL)are tangent and---------------- necessary , sufficient
condition are fulfilled.
·
A:----(slope of IC = slope of budget line
&
Dy/Dx= px/py
·
B:---(IC
is also convex to the origin)
So
we can say that consumer is in equilibrium position at IC2
And purchase OXe of x and OYe of commodity Y.