Business, Legal & Accounting Glossary
The term indifference curve refers to a line or graph that showcases all the possible combinations of two bundles of goods between which a consumer remains indifferent. It is a line denoting the consumption of various combinations of two products that offer the same satisfaction or utility to the consumer. Utility, as defined by Geanakoplis, is an instrument representing preferences.
According to Bohm and Haller, the chief objective of the indifference curve is to represent the potentially observable patterns of demand of individual consumers over particular goods. Economists including Francis Ysidro Edgeworth, Vilfredo Pareto and others are given credit for the development of the theory of indifference curves in the early part of the 20th century.
Indifference curves and budget constraints are used in Consumer theory in order to yield consumer demand curves.
Some important concepts related to indifference curve are as follows:
As per the law of diminishing marginal utility, marginal utility derived by a person from consumption of a particular product or service goes on decreasing even as that individual consumes another unit of that particular good or service. However, in order for this condition to be true, the production of other goods and services has to be constant.
The marginal rate of substitution is a rate at which a particular individual gives up some units of a thing to procure a unit of another thing.
Total utility is mathematically defined as an aggregate satisfaction derived from consuming individual units of a particular good or service. It may also be described as the summation of marginal utilities that have been received by an individual upon every individual consumption of a particular good or service.
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This glossary post was last updated: 2nd April, 2020 | 11 Views.