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## Microeconomics

### Course: Microeconomics>Unit 5

Lesson 3: Utility maximization with indifference curves

# Types of indifference curves

Indifference curves for normal goods, substitutes and perfect complements. Created by Sal Khan.

## Want to join the conversation?

• You talked about normal goods in this video, what if it is a Inferior good? Could you connect this with Substitution effect and Income effect. :) • What would the indifference curve look like if someone could only buy good x and never buy good y? For instance, a person who is Hindu will alway prefer a soy burger to a regular burger. What would the indifference curve look like then? • Explain why indifference curves can never cross • Each point on an indifference curve is a combination of two goods that would provide the same utility.

Consider the indifference curve of ice creams and cold coffee. Let us consider two indifference curves for the same. I'll try to explain this concept by contradiction.

By definition, in economics when we consider indifference curves, we say "more is better", that is the farther of the indifference curve is, the better. So we would always chose the one that is farthest given a choice.

Now back to the example, cold coffee and ice cream. If the two indifference curves crossed, they would have a common point, say A. 'A' has the same utility as any of the points on curve 1 and curve 2. But this cannot be true, as more is always better. The curve which is farther IS better than the one closer to the origin. Thus, they could not have crossed, else the utility from both the curves would have been the same.
• Is there a indifference curve that curves out? (opposite of the first example) What would a scenario be that uses one? • You will get a concave indifference curve (curving out not in) whenever it's better to have a lot of one thing rather than a mix of two things. That is, rather than complementary goods, you have incompatible goods*.

Here's a good example: Suppose you can either buy brand A hand-held radios or brand B hand-held radios for your company, but that brand A is only compatible with brand A, and brand B is only compatible with brand B. In this case, you might be indifferent between "20 radio sets of brand A and 0 of brand B" and "0 of brand A and 20 of brand B", so these two points would lie on your indifference curve. Now think what happens in between: Having 10 of each brand would clearly be LESS useful than either of these cases, so that would NOT lie on the same curve. However, perhaps having 15 of each brand might be as useful, if two groups of 5 employees never need to communicate directly (10 people carry both brands, 5 carry just brand A, 5 carry just brand B). You could then fill in the rest of the curve - you will see that it is concave rather than convex.

You could also extend this concept to "perfect incompatibility", where you would get a 90 degree angle with straight lines, again convex. (For example with the radios above, if every employee needed to be able to communicate with every other employee, then "20 of A and 20 of B" is no more or less useful than "20 of A and 0 of B" or "0 of A and 20 of B".)

* This idea of incompatibility assumes that it is costly or troublesome to trade goods of one kind for another once you have them.
• But how do you actually calculate the optimum point?
I miss a video explaining how to use algabra to calc this point.. • You need to know a little calculus to calculate the optimum point. The trick is that at the optimum point the slope of the budget line and the slope of the indifference curve is the same.
Thus, you can calculate the slope of the budget line by dividing Px by Py.
You can calculate the slope of the indifference curve at a given point by dividing the marginal utility of x by the marginal utility of y (=taking the derivative of the utility function by x and by y, and divide them).

Thus the optimum point is:

Px/Py = MUx / MUy

(1 vote)
• You already talked about Normal Goods; why don't you also discuss Indifference Curve for Inferior Goods ? It's quite interesting to learn the Indifference Curve for goods whose quantity demanded goes down as the budget line for that good expands. • Sal can u pls explain sub and income effect for perfect substitutes?? I have a final in it tomorrow!
(1 vote) • If good X and good Y are perfect substitutes, then the increase/decrease in the price of X will have an effect on the quantity consumed of good Y and of good B.

Lets say the Price of Good X Increases. Quantity consumed of good X decreases. And because they are perfect substitutes, if Qc of Good X reduced by 20, Qc of Good Y increased by 20. Next I will explain how the Sub and Income effects come in.

For the Substitution effect, When the price decreased, your level of satisfaction remained the same (your new budget line is also tangent to the original indifference curve, just not at the same point that the old budget line was on). Your Qc for good Y increased by the same amount that your Qc for good X did.

For the income effect, your income decreased while prices remained constant. This results in not a shift in Price ratio, but in satisfaction. (Your new budget line is tangent to a lower indifference curve) Because the price ratio remains the same however, the new budget line is parallel (but to the left of in this case) to the previous one that was created by the Substitution effect.
The new Quantity consumed for good x is smaller because of the additional income effect. And whatever the EXACT amount of consumption that is reduced of good x is seen as a gain in consumption for Good y.

Hope this helps
-Economics Major
• what is the compinations of 2 normal goods? • I scrolled down quite a bit but could not find the answer to how a set of indifference curves for two bads would look like?

Let's assume someone hates fast food and we plot the quantities of burgers and wings. Shouldn't indifference curves be concave towards the origin and the utility increase as one approaches the origin?

When I got it right the indifference curve shows how I should be compensated for an increase or decrease in the other good. In this case, if I go to the right and increase my numbers of wings, this decreases my utility. In order to offset that and hold my utility constant, I would have to reduce my quantity of hamburgers as well, am I right?

So that would gave you concave indifference curves towards the origin, which is also the preferred point on the diagram.  