How does indifference curve affect consumer choices?
An indifference curve shows a combination of two goods that give a consumer equal satisfaction and utility thereby making the consumer indifferent. Along the curve, the consumer has an equal preference for the combinations of goods shown—i.e. is indifferent about any combination of goods on the curve.
What is the indifference curve theory?
Definition: An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility. In other words, point A gives as much utility as point B to the individual. The consumer will be satisfied at any point along the curve assuming that other things are constant.
What is the concept of the theory of consumer?
Consumer theory is the study of how people decide to spend their money based on their individual preferences and budget constraints. A branch of microeconomics, consumer theory shows how individuals make choices, subject to how much income they have available to spend and the prices of goods and services.
What is the model of consumer choice?
According to authors Philip Kotler and Gary Armstrong, the basic model of consumer decision making involves a 5 step process: need recognition; information search; evaluation of alternatives; purchase decision; post purchase behavior.
Why is an indifference curve negatively sloped explain?
The indifference curves must slope down from left to right. This means that an indifference curve is negatively sloped. It slopes downward because as the consumer increases the consumption of X commodity, he has to give up certain units of Y commodity in order to maintain the same level of satisfaction.
How does optimization happen in consumer choices?
The budget constraint represents a consumer’s income, and optimisation occurs when consumers are able to reach the highest indifference curve possible, for their given level of income. Thirdly, indifference curves do not cross because this contradicts the principle that ‘more is preferred to less’.
What are the different types of indifference curves?
The four properties of indifference curves are: (1) indifference curves can never cross, (2) the farther out an indifference curve lies, the higher the utility it indicates, (3) indifference curves always slope downwards, and (4) indifference curves are convex.
What are the conditions for consumer’s equilibrium in indifference curve analysis?
According to indifference curve approach, consumer’s equilibrium is the point at which the slope of indifference curve is equal to the slope of budget line. Py = Price of Commodity Y, (ii) At the point of equilibrium, indifference curve must be convex to the origin. It means that MRSxy declines when X is consumed more.
How do consumers make choices?
But economists also believe that the choices people make are influenced by their incomes, by the prices of goods and services they consume, and by factors like where they live. This chapter introduces the economic theory of how consumers make choices about what to buy, how much to work, and how much to save.
Who proposed consumer theory?
Created by Martin Fishbein and Icek Ajzen in the late 1960s, the Theory of Reasoned Action centers its analysis on the importance of pre-existing attitudes in the decision-making process. The core of the theory posits that consumers act on behavior based on their intention to create or receive a particular outcome.
What are the three models of consumer decision making?
Three types of customer decision-making processes are:
- Extended problem solving,
- Limited problem solving, and.
- Habitual decision making.
What is the indifference curve theory in economics?
As indifference curve theory is based on the concept of diminishing marginal rate of substitution, an indifference curve is convex to the origin. According to this theory, a consumer always behaves in a rational manner, i.e. a consumer always aims to maximize his total satisfaction or total utility.
What does indifference to the consumer represent?
Any point along the indifference curve will represent indifference to the consumer, or simply put equivalent preference for one combination of goods or the other.
Can indifference curve intersect with each other?
Indifference curve cannot intersect each other. Each indifference curve is a representation of particular level of satisfaction. The level of satisfaction of consumer for any given combination of two commodities is same for a consumer throughout the curve. Thus, indifference curves cannot intersect each other.
How does indifference curve affect budget line?
Budget Line Since a higher indifference curve represents a higher level of satisfaction, a consumer will try to reach the highest possible IC to maximize his satisfaction. In order to do so, he has to buy more goods and has to work under the following two constraints: He has to pay the price for the goods and