Question

Economists use the concept of indifference curves to analyze individual decision-making. Our text uses them to evaluate the choices that individuals make when choosing between various goods, and when choosing between work and leisure. Discuss other decisions that indifference curves may be helpful in analyzing. Can you think of circumstances and choices that would produce extremely shaped indifference curves? If so, describe them and explain why you think they would take extreme forms.

Answer 1

Economists use the vocabulary of maximizing utility to describe consumer choice. People cannot really put a numerical value on their level of satisfaction. However, they can, and do, identify what choices would give them more, or less, or the same amount of satisfaction. An indifference curve shows all combinations of goods that provide an equal level of utility or satisfaction.

Consumer theory uses indifference curves and budget constraints to generate consumer demand curves. For a single consumer, this is a relatively simple process. First, let one good be an example market e.g., carrots, and let the other be a composite of all other goods. Budget constraints give a straight line on the indifference map showing all the possible distributions between the two goods; the point of maximum utility is then the point at which an indifference curve is tangent to the budget line (illustrated). This follows from common sense: if the market values a good more than the household, the household will sell it; if the market values a good less than the household, the household will buy it. The process then continues until the market's and household's marginal rates of substitution are equal.Now, if the price of carrots were to change, and the price of all other goods were to remain constant, the gradient of the budget line would also change, leading to a different point of tangency and a different quantity demanded. These price / quantity combinations can then be used to deduce a full demand curve. A line connecting all points of tangency between the indifference curve and the budget constraint is called the expansion path.

In economics theory, we do not find any circumstances and choices that would produce extremely shaped indifference curves. Indifference curves generally depicts any combinations of two products indicated by the curve will provide the consumer with equal levels of utility, and the consumer has no preference for one combination or bundle of goods over a different combination on the same curve.