Indifference Curve: Properties and More

Indifference Curve: Properties and More

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Chanchal
Chanchal Aggarwal
Senior Executive Content
Updated on Dec 1, 2023 18:09 IST

An indifference curve is a graphical representation in microeconomics showing different combinations of two goods that yield the same level of satisfaction to a consumer. The slope of the curve represents the marginal rate of substitution (MRS), showing how much of one good a consumer is willing to give up for more of the other while remaining indifferent. The curves are typically downward-sloping, indicating the law of diminishing marginal rate of substitution, and they do not intersect due to the non-crossing property.

2022_12_Indifference-Curve.jpg

The indifference curve is a locus of points, each showing a different combination of two substitutes, yielding the same level of utility to a consumer. If a consumer has to decide between two commodities, they are indifferent to any combination of products. This is why an individual consumes various goods over time and realizes that one good can be substituted without compromising satisfaction. Here we will learn more about the indifference curve and properties of the indifference curve.

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Table of Content 

What is the Indifference Curve?

In microeconomics, an indifference curve (IC) is a graph representing the combination of two goods that gives consumers the same level of satisfaction and utility. Consumer prefers all the combinations equally as they give them the same level of satisfaction. As at each consumption bundle, an individual is indifferent; it is said to be an Indifference Curve. Other names of indifference curve are also called the iso-utility curve or equal utility curve.

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What is Utility?

Utility is the benefit or dissatisfaction derived from consuming any good or service. Consumer preferences are defined by the consumption bundle derived from what customers face. Customers always try to maximize their utility based on rational choice.

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The Principle of Diminishing Marginal Utility

The law of diminishing Marginal utility implies that if a person consumes the same kind of product, the satisfaction or utility they get from that particular product diminishes as they consume more and more. 

For example, if you buy a particular type of chips for a while. After some time, you will realize that you will no longer find the chips that tasty, and you will switch to other alternatives. It is because the satisfaction you were getting earlier from chips is diminishing. 

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What are the Properties of the Indifference Curve?

Indifference curves assume that individuals have predictable, ordered preferences and aim to maximize utility. Thus, it will have the following three characteristics:

A good is considered a common good if it satisfies all three Indifference Curve properties. They can be summed up as follows:

1. Negatively sloped and convex to the origin

The indifference curve has a rightward declining slope. The rationale for the negative slope is that as consumers raise their consumption of commodity X, they must give up some units of commodity Y to have the same combination level. Additionally, ICs are convex to the origin because they are concave inwards. The MRS of X and Y declines as the consumer keeps replacing commodity X with commodity Y.

2. Higher IC shows a higher level of satisfaction

When one IC lies above and to the right of another IC, it implies a higher level of satisfaction and vice versa. As a result, the consumer prefers the combination of commodities on the higher IC to the combination on the lower IC. 

3. The indifference Curve does not Intersect

This can be explained in a hypothetical situation where two indifference curves intersect. The point of intersection implies that a combination of commodities on the higher curve offers the same level of satisfaction as that on the lower difference curve, which violates the basic assumption of ICs. Hence, ICs cannot intersect each other. 

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What is the Formula to Calculate Indifference Curve?

The formula used to create an IC is as follows:

U (t,y) = C

Where, 

c is the utility achieved on the curve is constant. 

T,y are the different quantities for two different goods, t, and y

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What does Indifference Curve Explain?

When people come across two products they want to purchase, they often consider tradeoffs, which economists explain using an indifference curve. People cannot buy everything since they have a limited budget. It is instead necessary to conduct a cost-benefit analysis. It visually represent this tradeoff by displaying the quantities of two alternative products that give a consumer the same utility (i.e., where they remain indifferent).

Let’s learn the IC through a schedule. Assuming that a consumer consumes two commodities, Pizza and Coldrink make three combinations for these commodities a, b, and c. 

Refer to the following table.

Comination Units of Pizza Units of Coldrink Total Utility
A 14 20 U
B 10 26 U
C 9 41 U
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There can be several different positions between A, B, and C on the indifference curve (IC) that could produce the same amount of consumer satisfaction. Because of this, the consumer remains indifferent toward any combination of two substitutes that produces the same satisfaction.

Criticism Of The Indifference Curve

The concept of IC is criticized on various grounds. Let’s understand them:

  1. Ignorance toward market behavior
  2. Two Commodities Model
  3. Ignorance towards demonstration effect
  4. Indifference toward risks and uncertainties
  5. Unrealistic assumptions
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Top FAQs on Indifference Curve

What is an indifference curve?

An indifference curve represents a set of different combinations of two goods that provide equal satisfaction and utility to a consumer. Essentially, it shows the consumer's preference for one good over another, maintaining the same level of happiness.

What does the slope of an indifference curve represent?

The slope of an indifference curve, known as the marginal rate of substitution (MRS), represents the rate at which a consumer is willing to give up one good in exchange for an additional unit of another good, while keeping the same level of utility.

 

Can indifference curves intersect?

No, indifference curves cannot intersect. If they did, it would imply conflicting preferences, which is inconsistent with the theory of consumer behavior in economics.

What does it mean if an indifference curve is steeper or flatter?

A steeper indifference curve indicates a strong preference for one good over the other. Conversely, a flatter curve suggests that the consumer is more willing to substitute one good for the other.

How is the concept of indifference curves used in consumer theory?

In consumer theory, indifference curves are used to analyze consumer choices between different bundles of goods. They help in understanding how a consumer would react to changes in prices and income, guiding predictions about demand patterns.

About the Author
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Chanchal Aggarwal
Senior Executive Content

Chanchal is a creative and enthusiastic content creator who enjoys writing research-driven, audience-specific and engaging content. Her curiosity for learning and exploring makes her a suitable writer for a variety ... Read Full Bio

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