Indifference Curves: Definition, Properties and Other Details

Classic analysis suggests that the optimal consumption bundle takes place at the point where a consumer’s indifference curve is tangent with their budget constraint. Standard indifference curve analysis operates using a simple two-dimensional chart. As we proceed downwards along any indi­fference curve the quantity of one commodity consumed (X) increases and that of the other (Y) diminishes. The marginal utility of X therefore, decreases while that of Y increases. It follows that an what are the properties of indifference curve increasing quantity of X will be required to compensate for the loss of Y. This is due to diminishing MRS. The desired rate of commodity Substitute falls as consumer moves along the same indifference curve from left to right.

Originally the consumer would be at position X on indifference curve, but as the price of apple falls the consumer will be able to move to higher indifference curves and I3. Points X, Y and Z show successive places on the price consumption curve corresponding to changes in the price 6f apples. The slope of the indifference curve at any point is the negative marginal utility of good A as a proportion of the marginal utility of good B.

Indifference curves are graphs that represent various combinations of two commodities which an individual considers equally valuable. The axes of those graphs represent one commodity each (e.g., good A and good B). Indifference curves are widely used in microeconomics to analyze consumer preferences, the effects of subsidies and taxes, and a few other concepts.

The only possibility is that it must slope downwards to the right. The consumer will get additional supplies of oranges by sacrificing diminishing quantities of bananas. The slope of the budget line is the relative price of good A in terms of good B, equal to the price of good A as a ratio of the market price of good B. Moreover, the slope of the budget line subtracted by relative price represents the opportunity cost of consumption. There is an opportunity cost because of the consumer’s limited budget.

1. Since A is on a higher indifference curve and to the right of N, the consumer will be having more of both the goods X and Y.
2. Both of these combinations would be points on an indifference curve of the young boy.
3. The higher the indifference curves are, the larger the quantities of both goods.
4. Hence Q represents a more valued and preferred combination of oranges and bananas than P.

People can be constrained by limited budgets so they can’t purchase everything. Indifference curves visually depict this tradeoff by showing which quantities of two goods provide the same utility to a consumer. Indifference curve analysis can be used to show why the demand curve usually slopes down. To do this, we will analyse one commo­dity, beer, and assume that consumer income and the price of all other goods remains constant.

Indifference curves have been criticized for making unrealistic assumptions about consumer behavior. Some economists argue that every choice indicates a preference for one combination over another rather than indifference to the outcome. Others note that consumer preferences can change over time. This would make a given indifference curve useless for any analysis.

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It can be assumed that as more and more of units of apple are substituted for orange, the consumer will be willing to give up fewer and fewer units of orange for additional units of apple. As the quantity of orange consumed increases, more of it will be required to compensate for loss of apple. This follows from the principle that as the consumption of orange increases the desire for it will fall and as the consumption of apple decreases the desire for it will increase. To show how Indifference Curves are constructed let us take the example of a consumer purchasing two goods only, apple and orange.

Indifference Curves in Economics: What Do They Explain?

An indifference curve which lies above and to the right of another shows preferred combinations of the two commodities. This means that indifference curves with larger bundles of goods lie further up and to the right than indifference curves with smaller bundles. In general, movements from left to the right in the commodity space or on the indifference map correspond to increases in utility. Virtually all indifference curves have a negative slope. The slope of the curve shows the rate of substitution between two goods, i.e. the rate at which an individual is willing to give up some quantity of good A to get more of good B.

Indifference Curves are convex (i.e., bowed inward)

Similarly, in Figure 4 (B) combination В is preferable to combination A, for combination В has more of X and the same quantity of Y. But as a matter of principle their effective region is in the form of segments. This is so because Indifference Curves are assumed to be negatively sloping and convex to the origin. Curves I2 and I3, until he reaches the saturation upon S where his total utility is the maximum.

Any point on the curve will theoretically provide equal satisfaction or utility to an individual. Consumers are thus “indifferent” to which combination they choose over another. An indifference curve is a chart showing various combinations of two goods or commodities that consumers can choose. Points along the curve represent combinations that will leave the consumer equally well off. A consumer is indifferent to changes in a combination as long as it falls somewhere along the curve.

Consumer equilibrium refers to a situation in which the consumer obtains the maximum total utility with the consumer’s budget. It occurs where the consumer’s budget line is tangent to the highest attainable indifference curve. The same reasoning applies if two indifference curves touch each other at point С in Panel (B) of the figure.

If the consumer happens to be at a point like N, he should move towards P, the point of tangency between the consumption- possibility line and an indifference curve. 4.10 shows that the highest indifference curve the consumer can reach is IC3 which just touches the con­sumption possibility line AB. Once the consumer reaches this position he will not shift his purchase pattern, unless his income changes or unless the price of X or of Y becomes different. From this reasoning we can conclude that the equili­brium position of the consumer is at the point where the Consumption Possibility Line is the tangent of an Indifference Curve. But with the same income M, he can also buy OM of X and PM of Y. In this case he is on IC3 which denotes a better situation than IC1.

Thus an indifference curve is always convex to the origin because the marginal rate of substitution between the two goods declines. If it touches X-axis, as I2 in Figure 6 at U, the consumer will be having OM quantity of good X and none of Y. Similarly, if an indifference curve I touch the f-axis at L, the consumer will have only OL of Y good and no amount of X. Such curves are in contradiction to the assumption that the consumer buys two goods in combinations. Therefore, an indifference curve cannot slope upward from left to right.