Indifference curve

[duck]

Hello
If you take a look at this picture...

what does it tell you?

[Kotze]

Blargh, I'm tired and it has been ages since I looked at one of those.

Both the horizontal and the vertical axis show quantities of goods, not prices. There are 3 indifference curves. A curve shows different combinations of the goods X and Y (and assumes for the sake of elegance that you can have all kinds of ratios between goods like with liquids), where every point on the same curve makes the person equally happy, ignoring the effect of having to pay this or that amount of money for it on that person's happiness. So imagine such a curve shows you combinations you are equally happy about if you get one of it as a gift and reselling doesn't enter your happiness calculation.

Imagine for this paragraph the picture showed only one such indifference curve, and the line that touches it: The line that touches such a curve shows the combination of goods that you can get for the same amount of money. For that line, the prices are assumed as fixed and there's no rebates and shit, which is why it's a straight line. So here is where money comes into play. The point where the line touches the curve tells you which of these bundles (that you would be indifferent about if receiving one of them as a gift) is the cheapest one.

But there are several indifference curves. What are they good for? Does the picture show decisions in relation to price changes? We have established that for a single indifference curve the answer is nope, because of the straight line (representing goodie combinations at the same cost) that touches it. But maybe each curve corresponds to situations with different prices? -Nah. Look at those simple lines representing money cost. They don't go over each other and shit.

It is assumed in neoclassical econ that more stuff makes you more happy, when we ignore having to pay money getting a bundle that lies on a point on curve 12 makes you more happy than a bundle on curve 11 and a bundle on curve 13 makes you more happy than a bundle on curve 12. The 3 curves correspond to spending different amounts of moola, so I go with answer d) individual income.

EDIT: Minor correction in the last sentence: I meant of course to write the diagonal STRAIGHT LINES that touch the curves correspond to spending different amounts of moola, derp. Each of these 3 straight lines correspond to a different budget, and all the points on such a line correspond to the different proportions how you can spend that money on units of good X and good Y.

[xub3rn00dlex]

D.

[duck]

thanks a lot. this was very useful.

[Vladimir Innit Lenin]

That's a pretty basic indifference graph, summed up pretty simply and neatly by Kotze.

To be fair, the indifference thing - though known not to be wholly accurate in practice - can sort of be accepted in a 'closed economy'-type situation.

The problem lies when you introduce a closed economy model of, say, 2 people and 2 goods, and introduce each individual's price-offer curve (based on reservation price) for each good, based on Cobb-Douglas preferences (essentially the need for a certain amount of both goods [say they are food and water, for example] and then a personal preference above and beyond this basic need. Then you see that, apparently, equilibrium lies at only one point and that, if (hypothetically speaking) each individual is endowed with only 1 good, then they either face the choice of finding the equilibrium price in the market, or death.

It's stupid. Classical Micro-economics is rather stupid, tbh. It is based on a set of pre-suppositions that even it exponents know don't hold in the real world. It's essentially a sub-field of economics where mathematicians can devise nice little models that really don't hold at all in reality and are thus, essentially, pointless. That's what i've gotten from it, anyway.