L shaped indifference curve. Useful Notes on L 2022-11-01
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An indifference curve is a graphical representation of a consumer's preferences for different combinations of two goods or services. It shows the different combinations of the two goods that provide the consumer with the same level of satisfaction, or utility. An indifference curve is typically shaped like a bow, with the consumer willing to trade one good for another as the amount of one good increases and the amount of the other decreases.
An L-shaped indifference curve is a special type of indifference curve that represents the consumer's preference for one good over all others. This occurs when the consumer is completely indifferent to the other good and is only interested in consuming the one good.
There are several reasons why a consumer may exhibit an L-shaped indifference curve. One reason is that the consumer may be highly specialized in the production or consumption of one good. For example, a farmer may only be interested in producing and consuming wheat, and may not care about any other goods. In this case, the farmer's indifference curve would be L-shaped, with wheat on the vertical axis and all other goods on the horizontal axis.
Another reason for an L-shaped indifference curve is that the consumer may have a strong aversion to one of the goods. For example, a consumer may be allergic to a certain type of food, and therefore have an L-shaped indifference curve with the allergen on the horizontal axis and all other goods on the vertical axis.
An L-shaped indifference curve can also occur when a consumer is faced with a budget constraint that limits their ability to purchase both goods. For example, if a consumer has a limited budget and can only afford to purchase one good, their indifference curve will be L-shaped, with the affordable good on the vertical axis and the unaffordable good on the horizontal axis.
In summary, an L-shaped indifference curve represents a consumer's preference for one good over all others. This preference can be due to specialization, a strong aversion to one of the goods, or a budget constraint that limits the consumer's ability to purchase both goods. Understanding and analyzing indifference curves can help economists and policymakers understand consumer behavior and make informed decisions about resource allocation and pricing.
Indifference Curves in Economics: What Do They Explain?
When indifference curve is L shaped then two goods will be? Two possibilities can be visualized: ADVERTISEMENTS: If the slope of the budget line is greater than the slope of indifference curves, B would lie on a higher indifference curve than L and the consumer will buy only Y. The correct answer is -. It is because at the point of tangency, the higher curve will give as much as of the two commodities as is given by the lower indifference curve. In other words, when price increases, demand decreases, and vice versa. All lower indifference curves, like Ul, will cross the budget line in two separate places.
In the long-run cost curve, we see that for every increase in the output size, the long-run cost of the plant increases. As you move from Point A to Point B, you are willing to give up 10 units of Good Y 40 units to 30 units for one additional unit of Good X 5 units to 6 units. Interpreting the MRS A high marginal rate of substitution a steeper slope on the indifference curve indicates that an individual is willing to give up a large amount of the good plotted on the y-axis in exchange for just one additional unit of the good plotted along the x-axis. The MRS can be approximated and interpreted as the amount of a good that an individual is willing to part with in exchange for one additional unit of another while remaining on the same indifference curve. This is quite inconsistent with the observed behaviour of consumers. Indifference curves for other people would probably travel through different points. According to this indifference curve, 3 chocolate bars and 2 packs of gummy bears is just as good as 2 chocolate bars and 4 packs of gummy bears.
Analyzing Indifference Curves: Purpose, Types, and Shape
The indifference curve slope shows the marginal rate of substitution MRS , which is the additional unit of a good a consumer will take on over another substitute or complement good. It means that every point on an indifference curve gives the same satisfaction to the consumer. However, in the real world o many commodities we often find that a typical consumer does not buy positive amounts of a the goods and services available in the market. Perfect substitute goods demand quantity and does not change, no matter which goods are selected over another. In case of concave indifference curves, the consumer will not be in equilibrium at the point of tangency between budget line and indifference curve, that is, in this case interior solution will not exist.
Try It Individuality of Indifference Curves Each person determines his or her own preferences and utility. Thus the consumer maximises his satisfaction or is in equilibrium at the corner point B where he buys only commodity Y and none of commodity X. It is worth noting that in case of convex indifference curves, corner equilibrium is however not inevitable, it occurs only when price of a commodity is too high as compared to the marginal rate of substitution of even the first unit of the commodity. How do you know if two goods are substitutes or complements? As seen above, indifference curves for perfect substitutes are linear. Indifference is conceptually incompatible with real-life economic action.
Similarly, any points on the middle indifference curve Um provide greater utility than any points on the lowest indifference curve Ul. What are the features of long-run average cost curve? Are substitution and income effects the same on indifference curves? In these circumstances the consumer will choose only one of two goods: he will buy either X or Y depending upon whether L or B lies on the higher indifference curve. . A low marginal rate of substitution a flatter slope on the indifference curve indicates that an individual is only willing to give up a small amount of the good plotted on the y-axis in exchange for just one additional unit of the good plotted along the x-axis. Likewise, if from Q he moves downward on the budget line, he will get on to higher indifference curves and his satisfaction will go on increasing till he reaches the other extremity point L. Remember, a slope can be approximated as the change in Y over the change in X, so we can interpret the marginal rate of substitution as the amount of Good Y that a person is willing to give up in exchange for one additional unit of Good X. We also call it an L-shaped recession or depression.
When indifference curve is L shaped then two goods will be
Indifference curves like Um are steeper on the left and flatter on the right. A choice like G is affordable to Lilly, but it lies on indifference curve Ul and thus provides less utility than choice B, which is on indifference curve Um. Given the definition of an indifference curve—that all the points on the curve have the same level of utility—if point F on indifference curve Uh is preferred to point B on indifference curve Um, then it must be true that all points on indifference curve Uh have a higher level of utility than all points on Um. In microeconomics, breaking down the various types of goods into categories help economists and businesses to see changes at a smaller scale. Compare two different choices between points that all provide Lilly an equal amount of utility along the indifference curve Um: the choice between A and B, and between C and D. Types of Indifference Curves There are two types of indifference curves: perfect complements indifference curves and perfect substitutes indifference curves.
He can increase his satisfaction still more by moving to point Z on the budget line BL. If a person prefers A to B and B to C, then they must prefer A to C. As you move towards the right corner of the graph, each indifference curve represents higher and higher levels of utility. Therefore, the concave indifference curves do not seem to be plausible or realistic. If Lilly were to start at choice G, and then thought about whether the marginal utility she was deriving from doughnuts and books, she would decide that some additional doughnuts and fewer books would make her happier—which would cause her to move toward her preferred choice B. Imagine a graph with that shape; it would represent a steep economic decline followed by a long period with no growth.
How is the indifference curve look like for bad goods?
By setting aside the assumption of putting a numerical valuation on utility—an assumption that many students and economists find uncomfortably unrealistic—the indifference curve framework helps to clarify the logic of the underlying model. Indifference curves assume that individuals have stable and ordered preferences and seek to maximize their utility. In case of perfect complements equilibrium point of the indifference curve IC 2 which is indifference curve just touching the budget line BL at point C Indifference curve IC 2 is the highest possible indifference curve to which the consumer can go. How can we distinguish goods from bad in economics? A substitute good example is when beef product prices increase, so people purchase chicken as a substitute. In other words, concavity of indifference curves implies that the consumer has a distaste for variety, that is, does not like diversification in consumption. Therefore, two indifference curves can never intersect each other.
Notes on Convex Indifference Curves and Corner Equilibrium
If an indifference curve touches either of the axes, it would mean that a consumer is consuming the whole of one good only, which is not possible and contradicts the assumption. Marginal Rate of Substitution can be defined as the amount of Good Y sacrificed to obtain an additional unit of Good X without affecting the total satisfaction level. Located at: License: Other. What are the examples of bad goods? An indifference curve is always concave to the origin IV. Can two goods be luxury at the same time? Lilly would receive equal utility from all combinations of books and doughnuts on a given indifference curve. If the marginal rate of substitution is increasing, the indifference curve will be concave, which means that a consumer would consume more of X for the increased consumption of Y and vice versa, but this is not common.