Indifference Curve Analysis

Consumer has to allocate his income between desirable goods and services. For simplicity, we assume that he spends all his income on two goods, say food and clothing. The consumer is now faced with the basic choice problem: what quantities of the two goods should he purchase given a limited money income.

To answer this question, we will consider the interaction between indifference curves (consumer tastes) and the budget line (constraints). Consumer equilibrium points formed by such interactions will be the points of optimal choice for the consumer (appendix 3A gives mathematical explanation of the theory). 

Assumptions of Indifference Curve Analysis

(1)     Rationality: The consumer behaves rationally as he maximises his satisfaction given his income and prices of goods and services.

(2)     Ordinal utility: The consumer can rank his preferences in accordance to the satisfaction they yield as first preference, second preference and so on. He can tell whether he prefers A to B or B to C but cannot state by how much.

(3)     Transitivity and consistency: If the consumer prefers combination A to Band B to C then he must prefer combination A to C. In other words, the consumer behaves consistently.

(4)     Non-satiety: The consumer always .prefers a large quantity of goods. He never reaches a point of saturation in case of any commodity. 

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