The concept of the indifference curve was introduced by Francis Edgeworth and Wilfredo Pareto. The indifference curve is a set of combinations of two goods, the utility of which is equally equal for an economic entity, and one good has no preference over the other.
Instructions
Step 1
Start by plotting a coordinate axis. On the X and Y sides, mark the quantities X (Qx) and Y (Qy) respectively. X and Y in this case denote each set of goods.
Step 2
The set of indifference curves that characterize the bundles of goods for one consumer represent an indifference map. The indifference map represents different levels of utility that satisfy the needs of one particular person, given one pair of goods. The further from the coordinate axes the indifference curve is located on the map, the more fully the needs of the consumer are satisfied with the help of a given set of benefits.
Step 3
On the indifference curve, it is easy to find a section at any point of which it is possible to effectively substitute one utility for another. This segment (in this case AB) is called the zone of replacement (substitution). Mutual replacement of goods will occur only on the segment AB. The lowest value of product X is at point X1, and product Y is at Y1. These values are minimal, but their consumption is necessary even in such an amount, since it is impossible to completely replace one good with another, no matter how much other good is offered. Here, the limiting threshold of substitution is such a value of one good, at which the presence of another equivalent good is not required. Thus, the marginal rate of substitution is the ratio of the quantity of the good X, from which the consumer can completely refuse, to the choice of the unit of the good Y, and vice versa.
Step 4
When determining the marginal rate of substitution, one should take it into account as a negative value. This is because by increasing the consumption of one good, the consumption of another is correspondingly reduced.
