The issue of consumer preferences is central to the real-world policy question posed at the beginning of this chapter. Transitivity and more is better imply indifference curves do not cross. Fig 4.22 shows three possible shapes for an indifference curve.

In this diagram, an increase of oranges from OM to OM1 is accompanied by a progressively diminishing number of bananas from ON to ON1. Thus a falling curve whose slope diminishes as we move to the right is bound to be convex to the origin to axes. In the graph below, point A illustrates the tangency condition the utility curve has with the budget line constraint. Suppose someone has one scoop of ice cream and 12 packets of chips. When asked how many packets of chips he is willing to give up for an additional scoop of ice cream, he replies he can give up six units of chips. As it can be seen in the above image, to attain an additional unit of Good X, i.e., to move from 1 unit to 2 units, the consumer has to sacrifice some units of Good Y, i.e., 3 units .

But, point ‘C’ lies on a higher indifference curve having more amount of commodity ‘Y\ It must be preferred to point ‘B’ by the assumption of non-satiety. Strictly convex indifference curves produce well behaved preferences. With convex indifference curves, the average bundle lies on a higher indifference curve compared to the points on the curve. Thus an indifference curve may be defined as a curve which shows combinations of goods which are equivalent to one another.

The indifference curve slopes down from left to right on the graph. The curve slopes downward as the consumption of commodity A increases in exchange for commodity B. It, thus, maintains the same level of consumer satisfaction in all combinations. All the combinations are equally desirable to the consumer. The consumer is indifferent as to which combination he receives. If a good satisfies all four properties of indifference curves, the goods are referred to as ordinary goods.

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy. Indifference curves indicate complete replaceability, which means they should not overlap in demand, but be parallel. More is BetterIf bundle A represents more of at least one good and no less of any other good than bundle B, then A is preferred to B.

Properties of Indifference Curve:

The slope of the indifference curve is known as the marginal rate of substitution . The MRS is the rate at which the consumer is willing to give up one good for another. For example, a consumer who values apples will be slower to give them up for oranges, and the slope will reflect this rate of substitution.

In the above diagram, the customer movements or the consumer moves from A to B to C to D, the willingness to substitute good X for good Y diminishes.. Also, two goods can never perfectly substitute each other. Therefore, the rate of decrease in a commodity cannot be equal to the rate of increase in another commodity.

Of these only curve IC] is meaningful because it is convex to the origin. In order to ensure this shape of an indifference curve we have to make a further axiom. If we repeat this exercise with M as the reference point, there is likely to exist a point like N which is indifferent to M. Then with N as reference point, we can establish P which is indifferent to N and so on. The continuous line (the ‘locus’ joining P and M) and X with similar points in the south-east quadrant is obviously an indifference curve.

It allows the consumer to buy within a given budget, i.e., within their current income. Indifference curves slope downwards from left to the right. However, there are two extreme scenarios for the shape of an indifference curve. It means that if a consumer prefers Good X over Good Y and Good Y over Good Z, then he/she prefers Good X over Good Z. A higher curve means a higher level of satisfaction, in contrast to a lower curve. 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.

• When asked how many packets of chips he is willing to give up for an additional scoop of ice cream, he replies he can give up six units of chips.
• The reason for this is that if a consumer wants to have more of one commodity, the other commodity must be slashed in a proportional amount.
• It is also assumed that consumer preferences are often monotonic in nature.
• Different values ofccorrespond to different indifference curves, so if we increase our expected utility, we obtain a new indifference curve that is plotted above and to the right of the previous one.
• Therefore, two indifference curves can never intersect each other.
• For example, Dalda and Rath Vanaspati, two different brands of cold drink such as Pepsi Cola and Coca Cola are generally considered to be perfect substitutes of each other.

When the consumer shifts from point A to C , he gets an additional quantity of both commodities . Hence, an indifference curve to the right always embodies a higher level of fulfillment. Because of this reason, the consumer always attempts to move outward to maximize his level of satisfaction. Indifference curves (IC’s) are at all times convex to the origin due to the fact of diminishing marginal rate of substitution. The marginal rate of substitution of one commodity for another reduces or diminishes when more and more of the one commodity is substituted for another. It means, the more we consume one commodity, the less we sacrifice another commodity so that IC is convex to the origin.

Analysis of Indifference Curve

The consumer consuming the two goods is assumed to be rational. In other words, the basic motive of the consumer is to maximize his/her satisfaction level through the consumption of two goods. It is assumed in the analysis that a consumer always prefers a large number of a good to smaller amount of that good provided that the amount of other goods at his disposal remains unchanged. It implies that the consumer never reaches at satiety point. Can be defined as the locus of points each representing a different combination of two good, which yield the same level of utility and satisfaction to a consumer.

The indifference curves on the Map show different levels of satisfaction or total utility. The higher the position of a curve (i.e., the further out it is on the map) the better it is for consumer. The consumer will like to be as high as possible on his indifference map. The degree of convexity of an indifference curve depends on the rate of fall in the marginal rate of substitution of X for Y. Another important property of indifference curves is that they are usually convex to the origin.

This again presupposes that rational consumers will prefer a variety of commodities combinations. As illustrated above in the indifference curve map, the curve gets flatter as you move down the curve to the right. It illustrates that all individuals experience diminishing marginal utility, where additional consumption of another good will generate a lesser amount of utility than the prior.

So, a horizontal or vertical or sloping up curve is not possible. 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. An indifference curve is used by economists to explain the tradeoffs that people consider when they encounter two goods that they wish to buy. Because people are constrained by a limited budget, they cannot purchase everything.

To understand this, let’s take a close look at Samaira’s situation. Samaira’s indifference can be analyzed with the following graphical representation of her Indifference Curve. It is the functionality of an Indifference Curve that can be explained under many assumptions. It is known that each and every Indifference Curve has an origin.

Concept of Utility: Cardinal and Ordinal

The slope of the budget line represents the relative pricing of two commodities. And this indifference in prices defines the opportunity costs. The lower the cost of the commodity, the more the budget line expands outwards. Consumers can rank a combination of commodities based on their satisfaction levels. Usually, the combination with the higher satisfaction level is preferred.

Indifference Curve – Definition, Schedule & Properties

Combination C should give grater satisfaction than combination B. This contradiction has occurred because our supposition was wrong and two indifference curves can not cut each other. In such cases the indifference curve is a straight line at an angle of 45° with either axis. Each indifference curve is a representation of particular level of satisfaction.

If in case, any indifference curve touches the axis, it implies that only one commodity is consumed by the consumer and demand for other commodity is zero. It may touch Y-axis if Y-axis represents money instead of a commodity. In other words, indifference set refers to the tabular representation of the combination of two goods giving the same utility or satisfaction to consumers.

An indifference curve shows a combination of two goods in various quantities that provides equal satisfaction to an individual. The aggregate of goods which lies on a higher indifference curve may be preferred by a purchaser or consumer to the combination which lies on a lower indifference curve. And, indifference curve theory assumes that the consumer has not reached the point of satiety.

A budget line is a locus of points showing alternative combinations of two goods that can be purchased with a fixed amount of money income and fixed prices of the two goods. 4.7 we find that in , , and , when consumption of A is reduced from 3 to 2 and 1 unit the consumption of O increases from 2 to 4 and 7. The rate at which O is being substituted for A is 1, properties of indifference curve 2 and 3 units of O per unit of A in the three cases respectively. The quantity of O which would just compensate the consumer for the loss of a marginal unit of A is called the marginal rate of substitution of A for O. But a consumer can compare two or more combi­nations of goods and say which of them he likes best or whether he likes them all equally well.