Deriving an Individual's Demand Curve for Necessity Is Derived from an Indifference Curve (Essay Sample)

Indifference Curve Analysis
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Indifference Curve Analysis
Deriving an Individual's Demand Curve for Necessity Is Derived from an Indifference Curve
A necessity good is good that a consumer cannot do without or cannot avoid buying. An indifference curve (IC) is a graph that conveniently describes the consumer's preferences with a given consumption bundle (a list consisting of all objects that affect the consumer's choice problem). It acts as a link in the relationship of combinations of good with the same satisfaction to a consumer (Tucker, 2010). However, it may be used in deriving a consumer's demand curve as explained below. Suppose the consumption bundle in consideration involves necessity goods, say (a, b), the indifference curve slopes from top left down to bottom right with a negative slope. It is concave to the origin. The shape assumed by the indifference curve is as illustrated in the figure1 below.
Y-axis =a, X-axis=b
Figure 1
Points above and that are on the right side of the indifference curve, with the consumption bundle (a, b) is known as the weakly preferred set to the consumption bundle (a, b) while bundles on the boundary are those that the consumer is indifferent to the consumption bundle (a, b). Suppose an individual spends a given amount on the bundle in consideration, that is, (a,b), the total utility is derived from the combination of the bundle such that u(a, b)=(a + b) (Dwivedi, 2014). Points along the indifference curve as discussed above will yield the same level of utility, therefore the consumer is indifferent between them since he or she may choose a point up to the left, middle or bottom to the right of an indifference curve and still get the same utility. However, it is important that the point chosen for consideration be an optimal point that is a consumer's optimal choice. The figure 1 above shows combination of a bundle that yields the same level of utility that is, along with the indifference curve. An individual is satisfied by any point on the indifference curve (Dwivedi, 2014). Any points below and to the left side of an IC always results to a less level of satisfaction, and any point above and to the right side of an IC will result to a greater satisfaction. A combination of the two goods that lie below and to the left side of the indifference curve is inferior to combinations on the indifference curve. A combination that lie above and to the right side of the IC and that yield a higher utility are referred to as superior combination.
Y-axis = a, X-axis = b
Figure 2
The figure above shows three indifference curves in which curve A represents the indifference curve for the consumer in consideration, with combination(a, b). Indifference curve C is inferior to indifference curve A. Similarly, IC A is also inferior to IC B. A consumer may prefer combinations on IC B, but he or she cannot afford. A consumer considers combinations on IC C as inferior compared to those on curve A and a B. A consumer may have a collection of indifference curves showing his or her preferences, though with the same shape. The steepness of the curve decreases as we move down the indifference curve from top left to bottom right. The slope of an indifference curve shows the marginal rate of substitution (MRS), that is, the rate at which one good is given up for another without inferring with the consumer's utility.
The MRS is, therefore, a measure of the slope of an indifference curve. Consider figure 3 below; it shows how the slope of an indifference curve varies indicating the change in a marginal rate of substitution down the curve. Suppose a consumer gives up a unit of a good at some point on the indifference curve, then the additional unit of the other good does not alter his or her satisfaction for example in the consumption bundle (a, b), the utility u (a, b)= ( a + b ), the consumer decides to give up one unit of good b for good a, then utility function will take the form u(2 a, b), but the utility of that consumer remains the same. The marginal rate of substitution decreases as we move down the indifference curve since the slope also decreases.
Y-axis=a, X-axis=b
Figure 4
The figure above shows utility maximization of a consumer with a necessity goods combination. This solution is arrived at, by choosing a point at which the IC is tangent to the budget line. Any change in price, (increase or decrease) for one good shift the budget line either to the right or left of the initial budget line. Suppose we ...