MN2565 Economics for Business Report

Physics
Title- MN2565 Economics for Business

1 Solution:-
The indifference curves are based on the principle of the 'Diminishing the Marginal
rate of substitution ‘or ‘Law of Diminishing Marginal utility.' It means than the
increase in the units of x leads to a decrease in a unit of y with the same amount.
The indifference curve shows the substitution between the two goods and their
combing satisfaction. The level of the satisfaction depends upon the diminishing
Marginal Rate that leads the convexity of the IC (indifference curve). It is a graph
that represents the combination of the commodity or goods, which gives the
consumer the same utility and satisfaction. For example- if two products are perfect
substitutes of each –other than IC will be a straight line, and MRS ( marginal rate of
substitution) will be constant. If two goods or commodities such as water and
gasoline in a car are complementary to each other, then the shape of the IC will be
convex or L-shaped to the origin.
Figure 1:- Intersection of Indifference curve
In the above graph -A is the intersecting point of the IC's. A and B lie gives the same
satisfaction level because it lies on the IC1. Another side A and C, offers the same
satisfaction level lies on the IC2. B and C are logically absurd and imply the same
level of satisfaction. No two indifference curves intersect or touch each other.
The consumer can get the same level of satisfaction from the different goods. IC
shows the combination of commodities or products for which the consumer is
different. If the slope of the IC curve is down from left to right, then it means that

the customer increases his degree of satisfaction of one good, he consumes very
less from the other commodity by keeping his level of satisfaction constant. If IC
curves show convex to origin, it means that consumer increases the use of one
good over the other, and this curve shows the 'marginal Rate of Substitution.' It
means that the rate at which consumer sacrifices one good for others.
For Example - John agrees to provide the 6 units of clothing on the additional unit
of food. There are two equal levels of satisfaction provides a combination of clothing
and food.
1 Unit of food equivalent to 6 units of clothing
2 2 units of food equivalent to 12 units of clothing
Various Combinations:-
Combination of both
commodity Food Clothing
A 1 12
B 2 6
C 3 4
D 4 3
Figure 2:- Shows the consumer IC’s