INDIFFERENCE CURVE OF SUBSTITUTE GOODS

 

 Learning Contents:                                                            

·         Basic Introduction to  substitute goods, Indifference curve and MRS

·         Indifference curve of  Perfect substitutes

Introduction

It is very important to revise the concepts of substitute goods, Indifference curve, and Marginal Rate of Substitution (MRS) to have a clear understanding of the Indifference curve of perfect substitutes.

Substitute goods

Substitute goods are those goods that can be used in place of each other. Consumers do not find any much difference in these goods and consider them equal such as two brands of tea, mineral water, soaps, soft drinks, etc. These goods serve same purpose for the consumers.

Indifference curve

An indifference curve refers to all those combinations of two goods that give the consumer an equal level of satisfaction or utility. Since all the combinations offer the same amount of satisfaction, the consumer prefers them equally. Hence it is named as indifference curve. All the combinations lying on the indifference curve gives a consumer with an equal level of satisfaction.

Marginal Rate of substitution

Marginal rate of substitution i.e. MRS or slope of IC that indicates how much quantity of a good (Say-Y) a consumer is actually willing to sacrifice in order to gain one more unit of another good (Say-X) so that the same level of satisfaction could be maintained was earlier.

INDIFFERENCE CURVE OF PERFECT SUBSTITUTES

When two goods are perfect substitutes of each other, the indifference curve will be a straight line as MRS would be constant i.e. consumer will exchange one good for another at a constant rate as he finds no difference between perfect substitutes and equally prefers both the goods. MRS in this case would be equal to one. Therefore, the indifference curve would be straight line.

To have a clear picture of indifference curves of perfect substitutes let’s take an example of two brands of mineral water Bisleri and Kinley which are perfect substitutes i.e. A consumer can easily choose between two of them and if one is not available at that point of time he may switch over to another one that is available at that point of time.

                       Table 1: Consumer’s Preferences Schedule

                                   Two brands of Mineral Water

Bisleri	Kinley
0	8	-------
1	6	2/1=2
2	4	2/1=2
3	2	2/1=2
4	0	2/1=2

            

                                                Plotting Consumer’s Preferences'

                                          Graphing Consumer’s Preferences

                                                                        Figure 1

Explanation

In Table 1, our MRS is equal to -2. i.e., the consumer sacrifices two bottles of Kinley water to get one additional bottle of Bisleri that eventually makes the shape of Indifference curve a straight line. If he were to give up any more, he would be on a lower indifference curve. Likewise, if he were to give up any less, he would be on a higher indifference curve. In this way, there have had more than two indifference curves. Since an indifference curve is downward sloping, it has a negative slope.

Test Yourself

Choose the Correct Answer

1. If two goods are perfect substitutes, then MRS would be

a. constant

b. diminishing

c. increasing

d. uncertain

2. In the case of two perfect substitutes, the indifference curve will be:

a. Straight line

b. L-shaped

c. U-shaped

d. C-shaped

3. Which of the following is the best example of Perfect substitutes?

a. Mango and Banana

b. Bisleri and Kinley water

c. Car and Bus

d. Pencil and Pen

Answers:

1. a 2.a 3.b