What is Indifference Curve? Approach, Characteristics, Definition

Indifference curves inherit the criticisms directed at utility more generally. Therefore, the rate of decrease in a commodity cannot be equal to the rate of increase in another commodity. That’s why we go beyond just reporting the news, and delve deep into the concepts and ideas that drive the global economy. From macroeconomic theory to the latest innovations in financial technology, we aim to provide our readers with a broad understanding of the forces that shape our world. Welcome to economatik.com destination for all things related to finance, economics, and business.

Independent Scale of Preference

The indifference curve is based on the assumption that a consumer considers different possible combinations of two goods and wants both goods. If an indifference curve touches either of the axes, it would mean that a consumer is consuming the whole of one good only, which is not possible and contradicts the assumption. Therefore, an indifference curve never touches either of the axes. In the above graph, points or combinations A, B, C, D, and E provide the same satisfaction level to Nisha. It can also be seen that as Nisha is consuming one additional quantity of chocolate, she has to sacrifice or give up some quantity of ice cream. Therefore, when Nisha moves from Combination A to B to consume one extra chocolate, she has to sacrifice 8 units of ice-creams.

• For instance, in order to have complete and transitive preferences, we must know something about the goods in the bundle.
• When he started consuming two cigarettes a day, his coffee consumption dropped to 8 cups a day.
• He tries to maximize his satisfaction with his given income or budget constraint.
• A perfect substitute is a good that makes a consumer just as well off as a fixed amount of another good.

Pricing: Methods, Objectives, Determinants, Factors Influencing, Approach

A position in which the consumer reaches the highest level of satisfaction, Given his money income and the prices of the two commodities. Thus, The figure shows that with every fall in the price of grapes, The budget line shifts to the right. We can make certain realistic assumptions about the shape of the Indifference curves.

It shows the consumer’s preference for one good over another only if it is equally satisfying. This again presupposes that rational consumers will prefer a variety of commodities combinations. The combinations represented by points B and F gave equal satisfaction to the consumer because of both lies on the same indifference curve IC2. This is equivalent to saying that as the consumer substitutes commodity X for commodity Y, the marginal rate of substitution diminishes of X for Y along an indifference curve. It slopes downward because as the consumer increases the consumption of X commodity, he has to give up certain units of Y commodity in order to maintain the same level of satisfaction. If an indifference curve does not slope downwards it can either be a vertical line or horizontal line or an upward sloping curve.

Each point on the curve is a different combination of two goods in various quantities. 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 that tracks 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.

Monotonic Preferences:

The utility can be expressed in terms of ordinal numbers, i.e., first, second etc. The IC touches oy-axis while IC1 touches ox-axis where he consumes a very large amount of Y and zero of X while incase of IC1, he has a large amount of X commodity while zero amount of Y commodity. But such trends are against the definition of an indifference curve. MRS is the rate of change in one commodity-y in relation to one unit change in commodity-X. The MRSxy is decreasing due to the operation of the principle of diminishing marginal rate of substitution as shown in the diagram.

In other words, the representation of consumer preferences by a number of indifference curves is known as an indifference map. An indifference map represents every possible indifference curve that the consumer has, which helps in ranking their preferences. Also, the combination of goods on the higher indifference curve gives a higher satisfaction level to the consumer. Therefore, the highest of the indifference curves of an indifference map is preferred by a consumer. An indifference curve is convex to the origin because of the application of the principle of diminishing marginal rate of substitution.

Therefore, the consumer remains indifferent towards any combinations of two substitutes yielding the same level of satisfaction. Therefore, the consumer is indifferent to any combination of two commodities if he/she has to make a choice between them. This is because an individual consumes a variety of goods over time and realises that one good can be substituted with another without compromising on the satisfaction level.

When the indifference schedule for X and Y is plotted on a graph, a curve is obtained, which is shown in Figure 1. In the case of any consumer, the utility refers to gain from the consumption of two commodities. In the curve, the quantity consumed by B2 will compensate for the increase in the amount consumed by B2. The Indifference Curve IC thus is a locus of different combinations of two goods that yield the same level of satisfaction. Therefore, the consumer’s equilibrium is established at point P. The consumer would definitely prefer to have a combination on Point T, provident he can purchase it.

Indifference Curves are Not Necessarily Parallel to Each Other

It has been so and diagrams were IC, ICI1, IC2, and IC3 indifference curves so different levels of satisfaction from the point of the level of satisfaction. As we defined the indifference curve gives the same level of satisfaction with the different what are the properties of indifference curve points of combinations of two commodities A, B, C, D, and E combinations. An Indifference curve is a geometrical representation of a consumer’s scale of preferences. Point B on IC2 represents more units of apples and oranges than point A on the IC1 curve. Hence point B on IC2 will give more satisfaction than point A on IC1. It is evident, therefore, that the higher the indifference curve, the greater the satisfaction it represents.

In the graph below, there are three different indifference curves, labeled A, B, and C. The farther from the origin, the greater utility is generated across all consumption bundles on the curve. In economics, an indifference curve is a line drawn between different consumption bundles, on a graph charting the quantity of good A consumed versus the quantity of good B consumed. At each of the consumption bundles, the individual is said to be indifferent. The indifference curve slopes down from left to right on the graph.

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. If we assume that the individual likes both goods, the quantity of good B has to increase as the quantity of good A decreases, to keep the overall level of satisfaction the same. Because both axes each represent one of the two goods, this relationship results in a downward sloping curve. This becomes pretty obvious if we look at the indifference map below. Shows a whole set of indifference curves which is called an indifference map.

In order to get the same level of satisfaction, an individual consumer has to consume more of X commodity and he has to sacrifice more of y-commodity. Each indifference curve represents the choices that provide a single level of utility. In other words, an infinite number of indifference curves are not drawn on this diagram—but you should remember that they exist.

• The below diagram shows an indifference map with three indifference curves.
• An Indifference curve is a curve that represents all those combinations of goods that give some satisfaction to the consumer.
• An entire utility function can be graphically represented by an indifference curve map, where several indifference curves correspond to different levels of utility.
• Recall that we are assuming that the tax credit will cause the average fuel economy of US cars to double.
• All higher indifference curves, like Uh, will be completely above the budget line and, although the choices on that indifference curve would provide higher utility, they are not affordable given the budget set.

It means as the consumer gets more and more apples he parts with less and fewer units of oranges. Consequently, the indifference curve is convex to the point of origin. Another characteristic of indifference curves is that two indifference curves never intersect each other as they represent different levels of satisfaction. Following indifference curves show the situation In the diagram two indifference curves IC and IC1 have been shown. Hence we can say that two indifference curves never intersect each other because they show different levels of satisfaction.

However, the theory assumes that a consumer can express utility in terms of rank. Consumer can rank his/her preferences on the basis of satisfaction yielded from each combination of goods. In microeconomics, indifference curve is an important tool of analysis in the study of consumer behavior. An individual will typically shift their consumption level as their income increases because they can afford more commodities. They’ll end up on an indifference curve that’s farther from the origin as a result and be better off.

A higher IC lying above and to the right of another IC implies a higher level of satisfaction and vice versa. In simple words, the combination of commodities on the higher IC is preferred by a consumer to the combination that lies on a lower IC. The slope of the budget line represents the relative pricing of two commodities. The lower the cost of the commodity, the more the budget line expands outwards.