Indifference Curve : Meaning, Assumptions & Properties
Individual preferences, given the basic assumptions, can be represented using something called indifference curves. An indifference curve is a graph of all the combinations of bundles that a consumer prefers equally. In other words, the consumer would be just as happy consuming any of them. Representing preferences graphically is a great way to understand both preferences and how the consumer choice model works—so it is worth mastering them early in your study of microeconomics. As all the combinations provide the consumer with an equal level of satisfaction, they prefer the goods equally.
Indifference Curves are always convex to the point of origin
A process of analyzing a simple two-dimensional graph representing two goods, one on the x-axis and the other on the y-axis is known as an Indifference Curve Analysis. If the graph of the combination of goods is on the line or curve, it means that the consumer gains the same satisfaction level or utility from the goods and thus, does not have any preference for the goods. For example, a child may gain the same satisfaction level from one ice cream and two chocolates, or three ice creams and one chocolate. Figure 7.14 showed Janet Bain’s utility-maximizing solution for skiing and horseback riding. She achieved it by selecting a point at which an indifference curve was tangent to her budget line.
Shift vs. Change in Slope:
In other words, the consumer is indifferent between any two points on the curve, as each combination provides them with the same level of happiness. This concept allows economists to analyze and understand consumer preferences and behaviors under different circumstances, such as changes in income or price levels. The assumption that consumers prefer variety is not necessary but still applies in many situations. For example, most consumers would probably prefer to eat both sandwiches and burritos during a week and not what are the properties of indifference curve just one or the other (remember, this is for consumers who consider them both goods—who like them). In fact, if you had only sandwiches to eat for a week, you’d probably be willing to give up a lot of sandwiches for a few burritos and vice versa. If you had reasonably equal amounts of both, you’d be willing to trade one for the other, but at closer to one-to-one ratios.
We know that more is better (showing higher utility) for the consumer. Hence B should be strictly preferred to C, or B and C cannot show equal level of utility. Indifference curves are a fundamental concept in microeconomics, as they provide a way to analyze consumer behavior and to understand the trade-offs that consumers are willing to make between different goods.
Similarly, in Figure 4 (B) combination В is preferable to combination A, for combination В has more of X and the same quantity of Y. To prove this property, let us take indifference curves contrary to this assumption. In Figure 4 (A) combination В of OX1+ OY1 is preferable to combination A which has a smaller amount of the two goods. To create an indifference curve, we want to identify bundles that this college student is indifferent about consuming. If a bundle has more burritos, the student will have to have fewer sandwiches and vice versa. By finding all the bundles that are just as good as latexA/latex, like latexB/latex and latexC/latex, and connecting them with a line, we create an indifference curve, like the one in the middle.
If the consumer is at a point on his consumption-possibility line where it crosses an indifference curve (such as N in Fig. 4.11) he is not getting the maximum possible from his income. He can improve his position by changing his purchases in such a way as to be on P, which is on a higher indifference curve (IC3). If the consumer happens to be at a point like N, he should move towards P, the point of tangency between the consumption- possibility line and an indifference curve. But with the same income M, he can also buy OM of X and PM of Y.
An Indifference Curve cannot Intersect or Touch Another Indifference Curve:
Let us consider any two combinations of goods on the same indifference curve, such as (h) and (g). Combination (g) has 1 unit of orange (O) more than combination (h). Hence, when the quantity of one commodity (A) in a combination of two goods increase, the quantity of the other commodity (O) must decline. Therefore, an indifference curve must slope downwards from left to right.
A consumer who values apples will be slower to give them up for oranges and the slope will reflect this rate of substitution. An indifference curve is a chart showing 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. Nisha is consuming two goods Chocolate and Ice-Cream, and is willing to consume different combinations of these goods to gain an equal level of satisfaction with each combination.
Some economists argue that the concept of indifference is hypothetical and therefore incompatible with real-life economic actions taken by consumers. People’s relative preferences have been found to change over time and depending on their social context. 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.
Any points on the highest indifference curve Uh, like F, provide greater utility than any points like A, B, C, and D on the middle indifference curve Um. Similarly, any points on the middle indifference curve Um provide greater utility than any points on the lowest indifference curve Ul. The convexity rule implies that as the consumer substitutes X for Y, the marginal rate of substitution diminishes. It means that as the amount X is increased by equal amounts that of Y diminish by smaller amounts. The slope of an indifference curve is negative, downward sloping, and from left to right.
- Lilly’s budget constraint, given the prices of books and doughnuts and her income, is shown by the straight line.
- The budget line AB shows that the consumer can either buy OB quantity of apples or OA quantity of oranges by spending his total income.
- Indifference curves are generally downward sloping and convex to the origin.
- It is not necessary at this stage to know how much utility is obtained from an apple or an orange.
You should understand, when graphically represented, that the indifference curve for standard preferences lies between perfect complements and perfect substitutes. Notice that figure 1.5 illustrates a change in the good on the vertical axis (sandwiches) over the change in the good on the horizontal axis (burritos). From this discussion and graph, it should be clear that the latexMRS/latex is the same as the slope of the indifference curve at any given point along it. The tangency condition between the indifference curve and the budget line indicates the optimal consumption bundle when indifference curves exhibit typical convexity. Therefore, the consumer is indifferent to any combination of two commodities if he/she has to make a choice between them.