Indifference Curve

Indifference Curve: An Overview

Developed first by Francis Ysidro Edgeworth in his seminal 1881 book, the theory of indifference curves is a vital component of ordinal utility and consumer theory. Used worldwide to predict and judge consumer behaviour, the approach prefers the study of consumer preferences, instead of measuring them in terms of money.

An indifference curve is a graphical representation that explores how a consumer may be indifferent to two goods or products that give him or her the same level of customer satisfaction and utility. Such a graph is a self-serving device prominently used in microeconomics to explain consumer preferences and budget constraints. Besides these, the other applications of indifference curves include welfare economics and the marginal utility theory.

Indifference Curve Analysis

An indifference curve is functional under many assumptions, that is, each indifference curve starts as a convex structure from the origin, and there is no intersection between any pair of indifference curves. It is assumed that consumers are more satisfied when buying goods on a high indifference curve.

The Following Example Helps Illustrate This:

Samaira, has 1 unit of food and 12 units of books. When asked how many units of books she is willing to give up in exchange for an additional unit of food, she responds saying she could give up 6 units of books for an additional unit of food. Thus we have two situations at hand:

  1. Samaira gains satisfaction from having 1 unit of food and 12 units of books.

  2. She is also satisfied with 2 units of food and 6 units of books.

As Samaira is faced with more such questions, an interesting scenario is observed:

Combination

Food

Books

A

1

12

B

2

6

C

3

4

D

4

3


The analysis of an indifference curve can be carried out on a simple two-dimensional graph. Each axis indicates a specific type of product. If the graph lies on a curve or line, it suggests that the consumer has almost no preference for any product, because all of the products deliver the same kind of satisfaction or utility to the consumer. 

Samaira’s indifference can be analysed with the following graphical representation of her indifference curve.

Indifference Curve-Image

Any combination lying on Samaira’s Indifference Curve yields the same kind of satisfaction to her. It is also called an Iso-Utility Curve.

Other indifference curve examples would include a teenager who might be indifferent between owning two band tee-shirts and one novel, or four novels and one band tee-shirt.

What is an Indifference Map?

A set of multiple indifference curves is known as an Indifference Map. This map demonstrates a summary of the consumer’s preferences for a product or set of products. Here’s a diagram to help you understand an indifference map better:  

Indifference Map-Image

The figure above, consisting of three indifference curves speculates the view that a consumer is indifferent to the combinations of products on the same indifference curve. Also, a consumer, say Samaira, would prefer the combinations on the higher indifference curve to the ones on the lower curves. A higher indifference curve indicates higher levels of satisfaction – combinations on IC2 yield greater satisfaction than those on IC1. 

Now that you know what an indifference curve is and how to analyse one, it’s time to revise a few concepts.

Test Your Knowledge:

  1. The further an IC is from its origin, the ________ :

  1. higher is the satisfaction level

  2. lower the satisfaction level

  3. same satisfaction levels are obtained

  4. None of these

  1. Does an indifference curve exhibit various possible combinations of two products that yield equal satisfaction to the consumer?

  1. Yes

  2. No

What is the Marginal Rate of Substitution?

The MRS or Marginal Rate of Substitution can be defined as the rate at which a consumer is prepared to exchange a product, M for another product, N. It can also be denoted by the slope of the curve. To understand this, let’s take a close look at Samaira’s situation.

Combination

Food

Books

MRS

A

1

12

-

B

2

6

6

C

3

4

2

D

4

3

1


As mentioned above, Samaira initially agreed to give up 6 units of books in exchange for an additional unit of food. Hence, the MRS for Samaira is 6. From the table, you can observe that in subsequent combinations, the MRS is 2 and 1. 

Thus the MRS of a product M for N is the quantity of N that can be compensated by an additional unit of M. Both situations yield the same level of satisfaction to the consumer in question. To help make this clear, it is imperative to learn the fundamental properties of indifference curves that are clarified in the next section.

But before you start off with the varied characteristics of indifference curve, it is important to first understand the following points:

  1. As Samaira is handed more units of food, she increasingly feels a desire for more and more units of food.

  2. Most of the products, the books and the food, are really very flawed substitutes for one another. If these could be substituted perfectly, the MRS would remain the same.

Test Your Knowledge:

  1. What is the shape of the indifference curve, when the MRS between product M and product N diminishes?

  1. Convex to the origin

  2. Concave to the origin

  3. A straight line

  4. None of these

Features of Indifference Curve

Several analyses of indifference curves have deducted the fact that as a consumer’s income drastically increases, the curve moves higher up the graph because a higher income means that the consumer can now afford more of each product. Studies suggest that the maximum consumption of goods take place at the point where the consumer’s indifference curve is sharply tangent with their spending capacity or budget.

The following section throws light on the many indifference curve properties:

  1. It has been observed that an IC predominantly slopes downwards, to the right. This means that when the quantity of one product in combination with another is increased, the quantity of the other significantly decreases.

  2. From Samaira’s example above, you learnt that as she trades in more and more clothing for food, she is willing to part with less clothing. This indicates a decreasing MRS. This diminishing rate leads to the convex shape of the indifference curve. Also:

  1. If two products can be perfectly replaced with each other, the indifference curve turns out to be a straight line with a constant value of MRS.

  2. If two products are perfect complements of each other, say a phone and a tablet, then in such a case, the curve is L-shaped and convex to the origin.

  1. A higher curve means a higher level of satisfaction, in contrast to a lower curve.

  2. It is generally known that two Indifference Curves never intersect each other. They may not always be parallel to each other as well. 

  3. An indifference curve never touches the axis.

Now that you are well-versed with the many intricacies of an indifference curve, you can hover to the NCERT notes and solutions available on the website, sample papers and reference notes for a more comprehensive learning experience. Previous years’ question papers and live demo classes on the app make learning so much more fun. For more on the theory of consumer behaviour and cardinal utility, install the Vedantu app on your device today.

FAQ (Frequently Asked Questions)

1. What is an Indifference Curve?

An indifference curve is a graph indicating the combination of all products that yield the same level of customer satisfaction to a consumer. Since all the goods give the consumer the same amount of satisfaction, making him or her indifferent to them, it is called an indifference curve.

2. Explain the Properties of an Indifference Curve.

The properties of an indifference curve are.

  1. It has been observed that an IC predominantly slopes downwards, to the right. This means that when the quantity of one product in combination with another is increased, the quantity of the other significantly decreases.

  2. If two products can be perfectly replaced with each other, the indifference curve turns out to be a straight line with a constant value of MRS.

  3. If two products are perfect complements of each other, say a phone and a tablet, then in such a case, the curve is L-shaped and convex to the origin.

  4. A higher curve means a higher level of satisfaction, in contrast to a lower curve.

  5. It is generally known that two Indifference Curves never intersect each other. They may not always be parallel to each other as well. 

  6. An indifference curve never touches the axis.