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INDIFFERENCE CURVES.pptx

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INDIFFERENCE CURVES.pptx

  1. 1. INDIFFERENCE CURVES By Tinto Tom
  2. 2. Indifference Curves  Indifference Curve theory developed by J. R Hicks and R.J.D Allen. Hicks and Allen criticized Marshall’s cardinal measurement of utility They introduces Ordinal measurement of utility. According to them utility can not be measured in quantitatively but it can be ranked
  3. 3. An indifference curve is the locus of points of combinations of two goods that gives the same level of satisfaction to the consumer. The consumer is indifferent over the points on an indifference curve.
  4. 4. A hypothetical Indifference Schedule • All the combinations of mangoes and oranges give the consumer the same level of satisfaction. • The combination of 60 apples and 2 bananas give the same level of satisfaction as the combination of 54 apples and 3 bananas. • Even 1 apple and 14 bananas give the same level of satisfaction as the any of the above combination. • The consumer has the freedom to substitute apples for bananas and vice versa. The consumer selects a particular combination based on commodity prices. When price of apples fall the consumer substitute apples for bananas. Combinations Apples Bananas 1 60 2 2 54 3 3 42 4 4 22 5 5 19 7 6 8 9 7 2 12 8 1 14
  5. 5.  The slope of the indifference curve is the Marginal Rate of Substitution (MRS xy) between two different commodities. Marginal rate of substitution defined as the amount of ‘Y’ that the consumer is willing to give up for getting one additional unit of ‘X’ . So that the individual remain in the same indifference curve. MRS xy Y X
  6. 6. An indifference curve map is a family of indifference curves. It indicates all possible preferences of the consumer over two commodities. A higher indifference curve shows higher level of satisfaction and lower indifference curve shows lower level of satisfaction. The consumer always prefer to have higher indifference curve to a lower indifference curve.
  7. 7. Indifference Map - Properties Higher indifference curve represents higher level of satisfaction and vice versa. Indifference curves cannot cut each other. Indifference curves are convex to the origin. Indifference curve slopes downward to the right.

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