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Managerial Economics

Notes Figure below shows the indifference curve drawn on the basis of the figure give in table.
It depicts, in general, all combinations of two goods which yield the same level of satisfaction to
the consumer. The consumer is indifferent about any two points lying on this curve.

Indifference Curve
An indifference curve of a consumer represents a particular level of satisfaction for the consumer.
A consumer may, infact, identify a large number of such curves each representing a different
level of satisfaction. An indifference map gives a complete description of a consumer’s tastes
and preferences as shown in Figure below to show the different satisfaction levels.

4.3.1 Assumptions

The following assumptions about the consumer psychology are implicit in indifference curve
analysis:

1. Transitivity: If a consumer is indifferent to two combinations of two goods, then he is
unaware of the third combination also.
2. Diminishing marginal rate of substitution: The rarer the availability of a good, the greater
is its substitution value. For example, water has a high substitution value as it is a scarce
resource.

3. Rationality: The consumer aims to maximise his total satisfaction and has got complete
market information.
4. Ordinal utility: Utility in this approach is not measurable. A consumer can only specify
his preference for a particular combination of two goods, he cannot specify how much.

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