Assumptions of Indifference Curve Analysis
In indifference curve analyses the consumer behavior is based on some assumptions. Prof. W. J. Baumol and others have taken the following major assumptions.
- Perfect Knowledge. A consumer is assumed to have complete knowledge regarding the type of goods available, their prices and their capacity to satisfy a want. He is also assumed to know his income during his consumption-planning period.
- Non-satiety. The consumer consumes both the commodities; he is not oversupplied with either commodity. He prefers to have more of x and/or y. This assumption is very reasonable and realistic. The consumer has no special inclination towards one particular commodity. He always tries to move higher and higher level of satisfaction.
- Consistencies and Transitivity. It is assumed that the consumer is consistent in his choice i.e. if in one period he chooses commodity A over B he will not choose B over A in another period if both the commodities are available in the same amount. This condition simply requires that the consumers tastes possess a conceptually simple type of consistency.
By transitivity we mean that if a consumer prefers A to B and B to C then he also prefers A to C. If he is indifferent between A and B between B and C, then he must be indifferent between A and C.
4. Tastes and preferences. Of the consumer are given. These do not change with the change in the period.
5. Diminishing Marginal Rate of Substitution. This assumption is technical in nature. According to this assumption as more and more units of X are substituted for Y, the consumer will be willing to give up lesser and lesser units of Y for each additional unit of X. When more and more units of Y are substituted for X which means our consumer will be willing to give up successively fewer and fewer units of X for each additional units of Y.