ECONOMICS

Economics

Economics

Indifference Curve

Indifference curve is a diagram depicting equal levels of utility (satisfaction) for a consumer faced with various combinations of goods.

One can represent this equation with a table that gives a "map" of consumer preferences. However, there are two problems with tables of this sort. First, they assume independence between goods that seems unlikely. The added utility of a shirt depends only on the number of previous shirts that have been bought, and not at all on the number of hamburgers. If shirts and hamburgers are substitutes or complements, this independence should not exist.

indifference curves show preferences according to the utility function, and each curve describes the combination of quantities that generate the same utility. The convex curvature means that mixed consumption is preferred to exclusive consumption of only one good. There is a set of indifference curves, and their utility levels increase with their distance from the origin. The budget line represents the restriction. Economists determine the gradient of the budget line by the relative prices of the goods, and it amounts to p1/p2. All combinations of goods within the triangle formed by the budget line and the axes are possible. The consumer's optimum is where the budget line is just tangent to the indifference curve with the highest possible utility level.

Usually, economists assume that an individual's preferences are constant. Therefore, changes in human behavior depend on variations in restriction. A consequence of this assumption is the belief that incentives, such as changes in income or relative prices, can systematically influence people. One can also apply this method of analyzing decision making to legal questions. For example, the economic explanation of criminal behavior: People commit a crime because they perceive that the expected benefits to them of the crime exceed their expected costs. The benefits are the various tangible or intangible satisfactions from the criminal act. The costs include various expenses (for guns, burglar tools, and so on), the opportunity cost of the spent time, and the expected cost of criminal punishment. The law can deter a criminal act by influencing these factors, for instance, by increasing the punishment and the probability of being sentenced; another deterrent is a reduction of unemployment, which increases the gains from lawful work (Andrews, 2005).

We assume that customers are able to choose from two alternatives that offer the same products in different quantities. The total utility of a consumer increases as the amount of products consumed increases, every additional units consumed adds less and less to the total utility of the consumer.

If a Consumers consume 2 different products, x & y , total utility function is an increasing function of the quantity consume, qx & qy. U = ƒ ( qx , qy).

Indifference Curve shows all product combinations of x & y that give the same satisfaction level to the consumer. The Collection of indifference curves is Indifference Map.

U each person have different level of satisfaction Utilities. The higher the indifference curve, the higher is the level of satisfactions of the ...