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Indifference Curves
The basic tool of Hicks-Allen ordinal analysis of demand is the indifference curve which represents all those combinations of goods which are same satisfaction to the consumer. Since all the combinations on an indifference curve give equal satisfaction to the consumer, he will be indifferent between them, that is, it will not matter to him which one he gets. In other words, all combinations of the goods lying on a consumer’s indifference curve are equally desirable to or equally preferred by him. To understand indifference curves, it is better to start with indifference schedules. In table two indifference schedules are given. In each schedule the amount of x and y in each combination are so much that the consumer is indifferent among the combination in each schedule. In schedule 1, the consumer has to start with 1 unit of x and 12 units of y. now the consumer is asked to tell how much of good y he will be willing to give up for the gain of an additional unit of x so that as much satisfaction remains the same. If the gain of one unit of x compensates him fully for the level of satisfaction as the initial combination (1X + 12Y). similarly by asking the consumer further how much of Y he will be prepared to forgo for successive increments in his stock of X so that his same whichever combination of goods in the schedule is offered to him, he will be indifferent among the combination of two goods included in the schedule.
Now we convert indifference schedules into indifference curves by plotting the various combinations on a graph paper. In fig an indifference curve IC is drawn by plotting the various combinations of the indifference schedules I. the quantity of good X is measured on the horizontal axis, and the quantity of the good Y is measured on the vertical axis. As in an indifference schedule, combinations lying on an indifference curve will also be equally desirable to the consumer, that is, will give him the same satisfaction. The smoothness and continuity of an indifference curve means that goods in question are assumed to be perfectly dividable. If the indifference schedule II is also converted into indifference curve, this will lie above the indifference curve IC.
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Now we convert indifference schedules into indifference curves by plotting the various combinations on a graph paper. In fig an indifference curve IC is drawn by plotting the various combinations of the indifference schedules I. the quantity of good X is measured on the horizontal axis, and the quantity of the good Y is measured on the vertical axis. As in an indifference schedule, combinations lying on an indifference curve will also be equally desirable to the consumer, that is, will give him the same satisfaction. The smoothness and continuity of an indifference curve means that goods in question are assumed to be perfectly dividable. If the indifference schedule II is also converted into indifference curve, this will lie above the indifference curve IC.
| I | II |
| Good X | Good Y | Good X | Good Y |
| 1 | 12 | 2 | 14 |
| 2 | 8 | 3 | 10 |
| 3 | 5 | 4 | 7 |
| 4 | 3 | 5 | 5 |
| 5 | 2 | 6 | 4 |
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