____________________________________________________________________________________________________ 
                   Subject                BUSINESS ECONOMICS 
                   Paper No and Title     1: Microeconomics Analysis  
                   Module No and Title    6: Indifference Curves 
                   Module Tag             BSE_P1_M6 
                                                                                                          
                                              
        BUSINESS                  PAPER NO.1 : MICROECONOMICS ANALYSIS  
        ECONOMICS                 MODULE NO.6 : INDIFFERENCE CURVES 
         
                   
                                           
    ____________________________________________________________________________________________________ 
            TABLE OF CONTENTS  
            1. Learning Outcomes 
            2. Introduction 
            3. Consumer Preferences 
            4. Indifference Curves and Indifference Map 
            5. Marginal Rate of Substitution  
                       5.1 Principle of Diminishing MRS 
                       5.2 Marginal Rate of Substitution and Marginal Utility  
            6. Properties of Indifference Curves 
            7. Exceptional Shapes of Indifference Curves 
                 7.1 Perfect Substitutes and Perfect Complements 
                 7.2 Good, Bad and Neutral commodities 
            8. Summary                  
     BUSINESS          PAPER NO.1 : MICROECONOMICS ANALYSIS  
     ECONOMICS         MODULE NO.6 : INDIFFERENCE CURVES 
      
             
                                                                                 
       ____________________________________________________________________________________________________ 
                       1.  Learning Outcomes  
                       After studying this module, you shall be able to learn about  
                               Meaning of consumer preferences 
                               Concept of indifference curve and indifference map  
                               The Law of Diminishing Marginal Rate of Substitution 
                               Relationship between Marginal Rate of Substitution and Marginal Utility 
                               Properties of Indifference curves 
                               Perfect Substitutes and Perfect Complements 
                               Good, Bad and Neutral commodities 
                                 
                       2. Introduction 
                       Indifference curve analysis is a very popular method used to explain consumer behavior. The 
                       technique of indifference curve was first invented by Edgeworth (1881) and then by Fischer (1892). 
                       Later  on  the  Italian  economist  Pareto  (1906)  put  it  to  extensive  use  and  the  results  were 
                       subsequently extended by Soviet economist Slutsky (1915). 
                        
                       We  have  already  explained  the  concepts  of  cardinal  and  ordinal  utility  theories.  Modern 
                       indifference curve approach uses the concept of ordinal utility. The indifference curve analysis 
                       assumes  that  the  consumer  have  complete  information  about  all  the  aspects  of  economic 
                       environment. Further, the consumer is assumed to act rationally, so given the money income and 
                       prices of goods, he will choose the combination from among various alternatives that gives him 
                       maximum satisfaction. 
                       3.  Consumer Preferences 
                       Preference means choosing one alternative over others. To analyze the preferences under two 
                       dimensional set up, the commodities, which a consumer can buy, can be divided into two groups 
                       as good X and good Y. The consumer’s choice among various alternatives depends upon his 
                       preferences, that is, the ranking he gives to various alternatives. Other factors, for example income 
                       and prices also influence his choice of an alternative. In indifference curve approach of consumer 
                       behavior,  certain  important  assumptions  about  the  nature  of  consumer’s  preference  are  the 
                       following. 
                           1.  Completeness: Under this assumption, the consumer is capable of comparing all the 
                                alternative combinations and ranks them according to utility. Given two bundles P and Q, 
                                he can decide whether he prefers P to Q, Q to P or he is indifferent between the two. 
                           2.  Transitivity: Transitivity of preference means that if a person prefers a combination P to 
                                Q and also prefers Q to R, then he will prefer P to R. Thus transitivity implies that 
                                consumer’s taste and preferences are consistent. 
          BUSINESS                          PAPER NO.1 : MICROECONOMICS ANALYSIS  
          ECONOMICS                         MODULE NO.6 : INDIFFERENCE CURVES 
           
                        
                                                                          
      ____________________________________________________________________________________________________ 
                         3.  Non–Satiation: More of a good is always preferable to less of that good. Put differently, 
                             “more  is  better”,  other  things  remaining  constant.  The  assumption  implies  that  the 
                             individual is not already over supplied or over satiated with any good and that the good is 
                             desirable. 
                      4.  Indifference Curves 
                     4.  Indifference Curves 
                     An indifference curve represents the various alternative combinations of two commodities, which 
                     give the same level of satisfaction to the consumer – so the consumer is ‘indifferent’ between these 
                     combinations. The indifference curve is a graphical representation of indifference schedule, where 
                     all the alternative combination of commodities gives exactly the same satisfaction level or utility 
                     to the consumer. To explain it further, consider the example below: 
                      
                                                                 Table 1 
                      
                              Combination                   Unit of good ‘X’                Unit of good ‘Y’ 
                                    P                               1                              100 
                                    Q                               2                              45 
                                    R                               3                              25 
                                    S                               4                              15 
                                    T                               5                              10 
                      
                      
                     The  given  table  shows  that  the  consumer  is  indifferent  between  the  given  five  alternative 
                     combinations (P, Q, R, S and T) of two goods (X and Y). When all the combinations are represented 
                     in the form of a graph, we obtain an indifference curve as shown in the figure 1. 
                      
                     [Figure 1: An indifference curve] 
                                                                   
                      
         BUSINESS                      PAPER NO.1 : MICROECONOMICS ANALYSIS  
         ECONOMICS                     MODULE NO.6 : INDIFFERENCE CURVES