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The main use of indifference curves is in the representation of potentially observable demand patterns for individual consumers over commodity bundles. [2] Indifference curve analysis is a purely technological model which cannot be used to model consumer behaviour.
In the case of two goods and two individuals, the contract curve can be found as follows. Here refers to the final amount of good 2 allocated to person 1, etc., and refer to the final levels of utility experienced by person 1 and person 2 respectively, refers to the level of utility that person 2 would receive from the initial allocation without trading at all, and and refer to the fixed total ...
Figure 2 presents this explanation in graphical form. In the figure, two indifference curves for a particular good X and wealth are given. Consider an individual who is given goods X such that they move from point A (where they have X 0 of good X) to point B (where they have the same wealth and X 1 of good X). Their WTP represented by the ...
Under the standard assumption of neoclassical economics that goods and services are continuously divisible, the marginal rates of substitution will be the same regardless of the direction of exchange, and will correspond to the slope of an indifference curve (more precisely, to the slope multiplied by −1) passing through the consumption bundle in question, at that point: mathematically, it ...
A set of convex-shaped indifference curves displays convex preferences: Given a convex indifference curve containing the set of all bundles (of two or more goods) that are all viewed as equally desired, the set of all goods bundles that are viewed as being at least as desired as those on the indifference curve is a convex set.
Whether indifference curves are primitive or derivable from utility functions; and; Whether indifference curves are convex. Assumptions are also made of a more technical nature, e.g. non-reversibility, saturation, etc. The pursuit of rigour is not always conducive to intelligibility. In this article indifference curves will be treated as primitive.
The Hicksian demand function isolates the substitution effect by supposing the consumer is compensated with exactly enough extra income after the price rise to purchase some bundle on the same indifference curve. [2] If the Hicksian demand function is steeper than the Marshallian demand, the good is a normal good; otherwise, the good is inferior.
The substitution effect is negative, as indifference curves always slope downward. However, the same does not apply to the income effect, which depends on how income affects the consumption of a good. The income effect on a normal good is negative, so if its price decreases, the consumer's purchasing power or income increases.