Economics - Indifference Curve
Introduction
The willingness of consumers to purchase a product or service is the fundamental source of profit for any business. Understanding consumer behavior is the first step in making profitable pricing, advertising, product design and production decisions. In order to make marketing decisions, managers need to know how consumers choose the bundle of goods and services they actually purchase from all possible bundles that they could purchase. Managers should be aware of the consumer-choice process when estimating the demand for the firms’ products, forecasting future demand, and making advertising decisions.
Consumer Preferences
From all the goods or services available to them, buyers choose a combination of items we call a market basket. Consumption of the bundle of goods in a market basket brings satisfaction to the buyer. Buyers choose between different bundles of goods, different market baskets, on the basis of the satisfaction they are expected to bring. A model of consumer 's as buyers is based on three assumptions.
1. Axiom of Completeness
Given two market baskets, A and B, a consumer will know whether she prefers A to B (written as A » B), does not prefers A to B (A « B) or is indifferent between them (A I B).
When confronted with a choice between two market baskets, both of which contain desirable goods, a consumer will definitely know which is preferred, or will definitely know that s/he would be equally happy with either, nor does it imply that the consumer finds both baskets undesirable. Rather, indifference implies that both baskets are equally desirable. This state of indifference plays a crucial role in the model of consumer choice.
2. Axiom of Non-Satiation
Given two market baskets, A and B, the consumer will always prefer the basket that has more of at least one item and no less of the other items.
3. Axiom of Consistency
Given any three market baskets, A, B, and C, if a consumer indicates that A » B, and B
The willingness of consumers to purchase a product or service is the fundamental source of profit for any business. Understanding consumer behavior is the first step in making profitable pricing, advertising, product design and production decisions. In order to make marketing decisions, managers need to know how consumers choose the bundle of goods and services they actually purchase from all possible bundles that they could purchase. Managers should be aware of the consumer-choice process when estimating the demand for the firms’ products, forecasting future demand, and making advertising decisions.
Consumer Preferences
From all the goods or services available to them, buyers choose a combination of items we call a market basket. Consumption of the bundle of goods in a market basket brings satisfaction to the buyer. Buyers choose between different bundles of goods, different market baskets, on the basis of the satisfaction they are expected to bring. A model of consumer 's as buyers is based on three assumptions.
1. Axiom of Completeness
Given two market baskets, A and B, a consumer will know whether she prefers A to B (written as A » B), does not prefers A to B (A « B) or is indifferent between them (A I B).
When confronted with a choice between two market baskets, both of which contain desirable goods, a consumer will definitely know which is preferred, or will definitely know that s/he would be equally happy with either, nor does it imply that the consumer finds both baskets undesirable. Rather, indifference implies that both baskets are equally desirable. This state of indifference plays a crucial role in the model of consumer choice.
2. Axiom of Non-Satiation
Given two market baskets, A and B, the consumer will always prefer the basket that has more of at least one item and no less of the other items.
3. Axiom of Consistency
Given any three market baskets, A, B, and C, if a consumer indicates that A » B, and B
References: Bruce R. Beattie and Jeffrey T. LaFrance, “The Law of Demand versus Diminishing Marginal Utility” (2006). Review of Agricultural Economics. 28 (2), pp. 263-271. Volker Böhm and Hans Haller (1987). "demand theory," The New Palgrave: A Dictionary of Economics, v. 1, pp. 785-92.