Page 76 - DECO101_MICRO_ECONOMICS_ENGLISH

Unit 6: Consumer Behaviour: Ordinal Approach

Indifference Curves are Convex to Origin Notes

Indifference curves are not only negatively sloped but are also convex to the origin. The convexity
of the indifference curves implies two properties:
1. The two commodities are imperfect substitutes for one another
2. The Marginal Rate of Substitution (MRS) between the two goods decreases as a consumer
moves along an indifference curve. This characteristic of indifference curves is based on the
assumption of diminishing marginal rate of substitution.
The assumption of diminishing MRS, as mentioned above, states an observed fact that if a
consumer substitutes one commodity (X) for another (Y), his willingness to sacrifice more units

of Y for one additional unit of X decreases, as quantity of Y decreases. There are two reasons for
this:
1. Two commodities are not perfect substitutes for one another.
2. MU of a commodity increases as its quantity decreases and vice versa.
Therefore, more and more units of the other commodity are needed to keep the total utility
constant.

Indifference Curves can neither Intersect nor be Tangent to one Another

If two indifference curves intersect or are tangent with one another, it will reflect two rather
impossible conclusions:
1. that two equal combinations of two goods yield two different levels of satisfaction.
2. that two different combinations – one being larger than the other – yield the same level of
satisfaction.
Such conditions are impossible if the consumer’s subjective valuation of a commodity is greater
than zero. Besides, if two indifference curves intersect, it would mean negation of consistency or
transitivity assumption in consumer’s preferences.
Let us now see what happens when two indifference curves, IC and IC’, intersect each other at
point A (Figure 6.1).
Point A falls on both the indifference curves, IC and IC’. It means that the same basket of goods
(OM of X + AM of Y) yields different levels of utility below and above point A on the same
indifference curve.
The inconsistency that two different baskets of X and Y yield the same level of utility can be
proved as follows.
Consider two other points: point B on indifference curve IC’ and point C on indifference curve
IC both being on a vertical line.

Points A, B and C represent three different combinations of commodities X and Y. Let us call
these combinations as A, B and C, respectively. Note that combination A is common to both the
indifference curves.
The intersection of the two indifference curves implies that in terms of utility, A=B; and A=C;
therefore A=C. But if B = C it would mean that in terms of utility,
ON of X + BN of Y = ON of X + CN of Y

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