Economics - Indifference Curve

2171 WordsMay 19, 20089 Pages
Introduction The willingness of consumers to purchase a product or service is the fundamental source of profit for any business. Understanding consumer behavior is the first step in making profitable pricing, advertising, product design and production decisions. In order to make marketing decisions, managers need to know how consumers choose the bundle of goods and services they actually purchase from all possible bundles that they could purchase. Managers should be aware of the consumer-choice process when estimating the demand for the firms’ products, forecasting future demand, and making advertising decisions. Consumer Preferences From all the goods or services available to them, buyers choose a combination of items we call a…show more content…
It measures the number of units of Y that must be given up per unit of X added so as to maintain a constant level of utility. MRS = ΔY/ΔX Figure 1. A typical indifference curve The consumer is indifferent between combinations A (4food and 45clothing) and B (6food and 30 clothing). Thus the rate at which the consumer is willing to substitute is MRS = ΔY/ΔX = 45 - 30 / 4 - 6 = - 7.5 The MRS is 7.5, meaning that the consumer is willing to give up 7.5 units of clothing for each unit of food added. 4. Indifference curves are the further from the origin, the greater level of utility associated with the curve. Combinations of goods on higher indifference curves are preferred to combinations on lower curves. 5. Indifference curves are everywhere dense. Theoretically, any number of such indifference curves could be generated by slicing the utility surface at different altitudes so that the floor of the surface might appear "dense" with concentric indifference curves. The collection of representative indifference curves may be referred to as an indifference curve map. Budget line Consumers normally have limited incomes and goods are not free. Their problem is how to spend the limited income in a way that gives the maximum possible utility. A budget line is the locus of all combinations or bundles of goods that can be purchased at given prices if the

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