Thursday, February 05, 2009

Is there a meaning to the area under the IDC?

I am teaching Intermediate Microeconomics this semester and yesterday in class we were talking about Indifference curves. While we wee discussing the different combinations of the two commodities along the same indifference curve, one of my students asked me if the area under the rectangle has any significance. To the best of my knowledge the area under the indifference curve which mathematically is the product of the quantities of the two commodities in utility space does not have a special significance. Do any of you know otherwise?

2 comments:

Noah said...

No meaning at all. Indifference curves are meaningful only relative to each other, so the space itself cannot have meaning.

Pug said...

Triya, it was so nice to catch up with you last week! I have learned a great deal from our conversation.

The area under the IDC can be viewed as all bundles that are Pareto inferior to those on the curve. When in the area, one should continue spending until reaching the frontier. The area above the IDC are Pareto superior, but unaffordable given the budget constraint. The IDC can therefore be seen as an iso-budget curve.

Yan