In: Economics

# Indiference Curves Technique in Economics.

What is Indiference Curves Technique in Economics?

Explain the fundamental assumptions of Indiference Curves?

## Solutions

##### Expert Solution

INDIFFERENCE CURVES TECHNIQUE -

Under indifference curves technique we do not measure the utility of a commodity but only make a comparison between utilities derived from two commodities and even this comparison is without measuring actual utility. We only see how much of a commodity, a consumer is willing to forego for getting one additional unit of a commodity so that his total satisfaction remains the same. In this way, we make a comparison between various combinations of two commodities which give him the same level of satisfaction. Because the satisfaction is constant, we say that a consumer is indifferent between these combinations i.e. he does not mind which one he will get because all these combinations give him equal satisfaction.

Assumptions of Indifference Curves Technique -

The indifference curves technique works on the following assumptions:

1. Rationality of Consumer:

The technique assumes that a consumer is a rational human being. He takes his decisions after due consideration of all the available alternatives and then chooses the best alternative.

2. Ordinal Utility:

As already clarified, the indifference curves technique is based on ordinal utility approach. Here we do not measure utility but only make a comparison between utilities of two commodities.

3. Diminishing Marginal Rate of Substitution:

The rate at which a commodity substitutes another commodity is known as the rate of substitution. In indifference curves analysis, the assumption is that as we increase the quantity of a commodity, its capacity to substitute another commodity goes on diminishing. The basic idea behind this assumption is the same as we have for diminishing marginal utility.

4. Consistency and Transitivity:

Consistency means that a consumer is consistent in his preferences. If he prefers one combination of commodities over another combination, then he will always do so. For example, if he prefers A combination over B combination, then he will always prefer A over B, when both are available. Transitivity means that there is consistency or continuity of preferences. For example,

if he prefers A combination over B i.e. A > B and also that B > C then A >C i.e. A combination will always be preferred over C.

5. Positive Utility:

Under indifference curves analysis, utility is always taken as positive. It means that more units of a commodity are preferred over lesser ones. Five units of a commodity are preferred over four units and four units are preferred over three units, and so on. (This assumption is, however, given up in higher level economics, where even negative utility is considered. In this situation, we get circular indifference curves).

Under indifference curves technique we do not measure the utility of a commodity but only make a comparison between utilities derived from two commodities and even this comparison is without measuring actual utility.

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