CONSUMER’S PREFERENCES AND INDIFFERENCE MAP

 

 Learning Contents:                                                            

·         Understanding Consumer preferences and Indifference curve.

·         Understanding Indifference Map.

Introduction:

The concept of the indifference map is based upon the concept of consumer preferences. So, it is important to first understand the concept of consumer preferences.

Consumer’s Preferences:

Preferences indicate individual tastes, likings, etc. that determine the amount of pleasure, happiness people get from the consumption of the goods and services and measured by the utility of various bundles or combinations of goods. It allows the consumers to rank these bundles of goods according to the levels of utility it provides them. Note that preferences are independent of income and prices. The ability to purchase goods does not determine a consumer’s likes or dislikes. One can have a preference for Rolex watches over Titan but only have the financial means to wear a titan watch.

The three fundamental assumptions about consumers’ preferences are:

1.      Completeness: 

When consumer preferences can be ranked or compared, then we say preferences are complete. For e.g. when a consumer can always say one of the following about two bundles: A is preferred to B, B is preferred to A, or A is equally good as B. People would comment that the consumer has lost the mind telling about the preferences. If a consumer cannot decide or rank his preferences about the bundle of goods, then preferences are not complete.

 

2. Transitivity/ Rationality/Consistent

We say preferences are transitive if they are internally consistent: if A is preferred to B and B is preferred to C, then it must be that A is preferred to C.

3. More is Better/non-satiety/monotonicity

Any bundle that has more goods is highly preferred than a bundle with less or no goods. Economist defines a commodity is good if preferred moreover others and bad is something for which less is preferred to more, such as pollution. A consumer is happier consuming good products whereas he is unhappy consuming bad products.

Table 1: Understanding consumer’s preferences for book and clothes 

      Fig.1: Showing Preferences for Books and Clothes.

                        

          Fig.2: Graphing Preferences with Indifference curves.

Explanation

One of the simplest ways to summarize information about a consumer’s preferences is to create a graphical interpretation___a map___of them.

·By joining the consumer preferences with With the help of a line we get our first indifference curve named IC₁. Similarly, joining other consumer’s preferences for combination E and combination D, we would have indifference curves named  IC₂ & IC₃ respectively.

·All combinations of books and clothes in the right side red lined area is preferable to combinations along or below the curve.

·   An individual is indifferent between all combinations of books & clothes along the IC₁ curve.

·   All combinations of books and clothes in the left side blue lined area is inferior or less preferable to those combinations on or above the curve.

 

Indifference Map

An indifference Map is the collection or family of various indifference curves. Indifference map or preference map, which is a complete set of indifference curves that summarize a consumer’s tastes. Drawing various Indifference curves(IC’s) on the graph, we get Indifference Map.

Different IC’s shows the consumer preferences i.e. some consumer might prefer more of a good say pizza and less of other say coffee and vice versa. Different IC’s gives different utility to the consumer.

                                               Figure1: Indifference Map

                                      

Explanation 

The indifference curves in the indifference map indicate different preferences of the consumer based on their liking, taste, income, etc.

We know that a consumer enjoys an equal level of satisfaction for all those combinations lying on the same indifference curve. One important thing to understand that Higher IC shows a higher level of satisfaction or a consumer prefers the combinations on the higher indifference curves (which are on the right side of the figure i.e. IC₃ to those on the lower ones (or the left side of the figure i.e. IC₁ and IC₂).This is because a higher indifference curve implies a higher level of satisfaction. Therefore, all combinations on IC₁ offer the same satisfaction, but all combinations on IC₃ give greater satisfaction than those on IC₂ and IC₁.