What is Indifference Curve? Discuss the properties of Indifference Curve. Discuss the applications/importance of Indifference Curve Approach.
What is Indifference Curve? Discuss the properties of Indifference Curve. Discuss the applications/importance of Indifference Curve Approach.
Ans.
Concept of indifference curve analysis is based on the assumption that every customer has a scale of preference between two or more commodities. There are some combinations of these which provide him equal satisfaction. The customer can choose any of these combinations and if he chooses any combination, he is indifferent to all other combinations. Such combinations can be represented on a curve also, which is known as Indifference curve. An indifference curve is a curve which represents different combinations of two goods which give a consumer equal level of satisfaction.
According to Prof. K.E.Boulding, “Indifference curves are the lines of equal preferences. They are called indifference curves, because they represent combinations of quantities which are neither better nor worse than each other, but are indifferent”.
The following are the properties of Indifference Curves:
(i) Negative Slope: An indifference curve always slopes downward from left to right because when a consumer takes additional units of a commodity, then some aits of the other goods will have to be given up, to maintain the same level of satisfaction on the indifference curve.
(ii) Indifference Curves are always convex to the origin: This property of an indifference curve is based on Diminishing Marginal Rate of Substitution. When a customer goes for an additional unit of one product, he has to reduce the consumption of the other product, to get the same level of satisfaction as the earlier combination. However, the rate of substitution will continue to reduce with each additional unit of consumption. Thus, the curve will neither be a straight line nor concave to the origin, but will always be convex to origin.
(iii) Two indifference curves can never cut each other: The reason for this property is that, different indifference curves represent different levels of satisfaction. If two indifference curves cut each other at any point, it means that at that point the level of satisfaction is the same for two different indifference curves, which is not possible.
(iv) Indifference curves neither touch X-axis nor Y-axis: Indifference curves have basic assumption that the consumer purchases combinations of different commodities. Therefore, he is not supposed to buy only one commodity, because in that case with only one commodity a combination cannot happen. Also, in that case, the indifference curve will touch either of the axis, which cannot happen for an indifference curve.
(v) Indifference curves need not be parallel to each other: Indifference curves need not be parallel. They can be parallel to each other only if the two commodities are independent of each other (which they are not, in case of indifference curve) in the sense that they are neither substitutes nor complementary goods and also one of the good is ‘inferior’ and the other is ‘superior.
The technique of indifference curves has special significance because of its application in almost every area of economic activity. A few such applications can be mentioned as follows:
1. In the theory of production: The basic aim of a producer is to attain a low cost combination. Indifference curves are useful in the realization of this objective. When we use these curves in the theory of production, they are called iso-product curves.
2. In the theory of Exchange: Prof. Edgeworth used the technique of indifference curves to show the mutual gains from the exchange of two goods between two consumers. Exchange makes it possible for both the consumers to reach a higher level of satisfaction. The process of shifting to the higher level of satisfaction is explained with the help of ‘contract curves.’
3. In the field of Rationing: This technique can also be made use of in the field of rationing. Ordinarily two commodities are rationed out to different individuals, irrespective of their preferences. But if their respective preferences are considered and the amounts of the two commodities be distributed among consumers according to their scale of preferences, each of them shall be in a position to search a higher indifference curve and satisfaction.
4. In the measurement of consumer’s surplus: Indifference curve technique has changed the old concept of consumer’s surplus. Consumer’s surplus can be measured with the help of this technique without any need for making unrealistic assumptions.
5. In the field of taxation: The technique is also applied to test preference between a direct and indirect tax. With the help of indifference curves it can be shown that a direct tax is preferable to an indirect tax as regards its effects on consumption and satisfaction of the tax payer.
In view of the above application of the technique, it may be stated that it forms an integral part of the modern welfare economics.
