Managerial Economics:- Indifference Curve, Giffen paradox, Budget line, Marginal rate of substitution

Indifference Curve (IC)
It is a curve showing the various combinations of two commodities that give equal level of satisfaction to the consumer.

Properties

• Indifference curves are always downward sloping
• They move from left to right
• Always two commodities are considered
• In order to have more of x commodity less of y is consumed
• IC are always convex to the origin
• The slope of the budget line determine the maximum satisfaction point
• Two IC never intersect each other

Budget line:-

It is the line showing the income of the consumer to be spend on the consumption of the two commodities. The income will be spend totally without having any surplus left.

Assumptions

• Rationality
• Utitilty is ordinal
• Diminishing marginal rate of substitution
• The total utility of the consumer depends on the quantities of the commodities consumed           u = f (q1+q2......qn)
• Consistency and transitivity of choice i.e. if A>B then B will never be preferred over A. Also  if A>Band B>C then A>C

Terminology

1. :-The Marginal rate of substitution:

2. Giffen Paradox:- When due to increase in the income of the consumer he moves on to more high valued product and leaves the consumption of the lower value product due to increase in his productivity capacity  eg:- coarse grains, Jowar etc

Special Types of indifference curves