Consumer
choice to choose from the
various combinations of goods doesn’t
only depend on budget constraints, but also on the preference for items. Consumer preferences allow him to choose
different combinations of two goods, such as Pepsi
and Pizza. If a customer is
offered a choice, he would
choose the combination that best suits
his taste. If both combinations are equal to his taste, it can be said that the consumer indifference
to the two combination.
Consumer preferences can be represented
by the indifference curve, which
shows the combination of Pepsi
and Pizza which promote equal
satisfaction to the consumer.
 |
| Indifference Curve |
Movement Along an indifference curve
Consumers are said to be indifferent to the combination
of A, B, and
C because the dots were still on the same
curve. It can be clearly seen also
that if pizza consumption is reduced,
for example, from A to B, the consumption of Pepsi
is increased to maintain customer satisfaction. Slope of any point on the indifference curve shows the willingness of
consumers to swap an item with other items. This
rate is called as marginal rate
of substitution / marginal
rate of substitution
(MRS). MRS measures
how many Pepsi consumers need to compensate for the reduction of one unit of Pizza. Note that the
indifference curve is not a straight
line. This happens because the
MRS is not the same for all points on the
curve. The rate at which consumers
are willing to exchange an item
with other items
depends on the amount of goods that have been consumed. The rate at which consumers are willing to exchange Pizza with Pepsi depends
on whether he is hungry or thirsty, which in turn depends on the number of Pizza and Pepsi that
has been consumed.
These are four properties
of indifference curves.
1. Higher indifference curves are preferred over the
low one 2. An indifference curve is downward sloping
3. Indifference curves are not crossed each other
Indifference curves crossed
each other as shown below may not happen. It is because of this premise will not
fit or contradict the main premise in economy: consumers prefer to
consume more stuff.
 |
| Crossed Indifference Curve - impossible |
People are more willing to exchange goods when
they have abundant and less willing to exchange
goods when they
have a few
At point A,
the consumer has few Pizzas and many Pepsi, so it takes a lot
to make him exchange
Pepsi to a pack of Pizza. MRS = 6 Pepsi per one pack of Pizza.
At point B,
the consumer has a lot of Pizza and a few Pepsi, so
he just needs a little extra Pepsi to cut a pack
of Pizza. MRS =
1.
Source: Principles of Economics - Mankiw (5th)
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