It is like a contour map showing the height of the land above sea-level where instead of height, each indifference curve represents a level of satisfaction. If the various combinations are plotted on a diagram and are joined by a line this becomes an indifference curve, as I1 О in the Figure 12.1. The indifference curve I1 is the locus of the points L, M, N, P, Q, and R, showing the combinations of the two goods X and Y between which the consumer is indifferent. Lilly’s budget constraint, given the prices of books and doughnuts and her income, is shown by the straight line. Lilly’s optimal choice will be point B, where the budget line is tangent to the indifference curve Um. Lilly would have more utility at a point like F on the higher indifference curve Uh, but the budget line does not touch the higher indifference curve Uh at any point, so she cannot afford this choice.
The Optimal Consumption Bundle
In other words, at any point of the indifference curve gives the same satisfaction level to the consumer. The same satisfaction level gained by the different combinations of two goods makes the consumer indifferent; hence, the name indifference curve. Because of this reason, an individual can use the indifference curve to depict the demand pattern and preferences of a consumer for a different set of commodities. These arguments about the shapes of indifference curves and about higher or lower levels of utility do not require any numerical estimates of utility, either by the individual or by anyone else. Given these gentle assumptions, a field of indifference curves can be mapped out to describe the preferences of any individual. An indifference curve denotes a set of different combinations of two commodities or goods, providing the same level of satisfaction to the consumer.
Indifference Curves: Assumptions and Properties Economics
It means that if combination A is preferable to В, and В to C, then A is preferable to C. Similarly, if the consumer is indifferent between combinations A and B, and В and C, then he is indifferent between A and C. This is an important assumption for making consistent choices among a large number of combinations. To simplify the concept of indifference curve and to properly analyse the consumer’s demand of two different commodities, the various assumptions are made. A higher indifference curve that lies above and to the right of another indifference curve represents a higher level of satisfaction and combination on a lower indifference curve yields a lower satisfaction.
Now, of course, it’s not always that simple, but in basic economic theory, we can assume that consumers have a preference for larger quantities. The higher the indifference curves are, the larger the quantities of both goods. In the diagram quantity of apples is shown on the ox-axis and the quantity of oranges on the oy-axis. Combination A on this curve represents more units of oranges with the same units of apples as compared with combination C. Indifference curves slope downward to the right because the consumer has to reduce the consumption of one commodity (y) if he increases the consumption of commodity-x. In order to maintain the same level of satisfaction, he has to increase the consumption of commodity x with the decrease in the consumption of commodity y.
Basic Assumptions of an Indifference Curve Analysis
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. 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.
3.8, it is shown that the in difference IC touches Y axis at point C and X axis at point E. At point C, the consumer purchase only OC commodity of rice and no commodity of wheat, similarly at point E, he buys OE quantity of wheat and no amount of rice. Our basic assumption is that the consumer buys two goods in combination. 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. In cases where two goods are perfect substitutes, the indifference curves will be straight lines with a constant slope. This is because the consumer is willing to trade one good for the other at a constant rate, without any preference for diversification.
An Indifference Curve Neither Touches Horizontal Axis Nor Vertical Axis
For example, two brands of bottled water that have identical taste and quality would be considered perfect substitutes. To understand why higher indifference curves are preferred to lower ones, compare point B on indifference curve Um to point F on indifference curve Uh. Point F has greater consumption of both books (five to three) and doughnuts (100 to 84), so point F is clearly preferable to point B. More generally, for any point on a lower indifference curve, like Ul, you can identify a point on a higher indifference curve like Um or Uh that has a higher consumption of both goods. The level of satisfaction of consumer for any given combination of two commodities is same for a consumer throughout the curve.
- One of the properties of the indifference curve is that it is strictly convex and never concave.
- Consumer behaviour is studied on the basis of the indifference curve approach because it has removed the weaknesses of the cardinal approach based on utility analysis.
- But there are some budget constraints due to the low income of the consumer.
- The indifference curve slopes down from left to right on the graph.
Given the definition of indifference curve and the assumptions behind it, the indifference curves cannot intersect each other. It is because at the point of tangency, the higher curve will give as much as of the two commodities as is given by the lower indifference curve. The slope of the indifference curve is the marginal rate of substitution (MRS).
Limitations of Indifference Curves
There is no single formula for all indifference curves, as the specific functional form depends on the utility function used to represent a consumer’s preferences. Common utility functions used in economics include the Cobb-Douglas utility function, the Constant Elasticity of Substitution (CES) utility function, and the Perfect Substitutes utility function. People cannot really put a numerical value on their level of satisfaction. However, they can, and do, identify what choices would give them more, or less, or the same amount of satisfaction.
- We can see that when X1 amount of commodity X was consumed, Y1 amount of commodity Y was also consumed.
- It is like a contour map showing the height of the land above sea-level where instead of height, each indifference curve represents a level of satisfaction.
- When a consumer desires to have combinations of more than two commodities, say, three commodities, we will have to draw three-dimensional indifference curves which are quite complex.
- The same reasoning applies if two indifference curves touch each other at point С in Panel (B) of the figure.
- This property is based on the law of diminishing marginal rate of substitution.
Indifference curves are essential tools in microeconomics, representing the set of all consumption bundles that provide a consumer with the same level of satisfaction or utility. In simpler terms, an indifference curve illustrates various combinations of two goods that make a consumer equally happy. These curves are typically downward sloping, indicating that as the quantity of one good increases, the quantity of the other good must decrease to maintain the same level of utility.
Higher the indifference curves, higher will be the level of satisfaction. This means, any combination of two goods on the higher curve give higher level of satisfaction to the consumer than the combination of goods on the lower curve. In the above diagram, IC is an indifference curve, and A and B are two points which represent combination of goods yielding same level of satisfaction.
An indifference curve shows all combinations of goods that provide an equal level of utility or satisfaction. Choice theory formally represents consumers by a preference relation, and use this representation to derive indifference curves showing combinations of equal preference to the consumer. Many core principles of microeconomics what are the properties of indifference curve appear in indifference curve analysis including individual choice, marginal utility theory, income, substitution effects, and the subjective theory of value.
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