Note on Indifference curve: Meaning, Assumptions and Properties

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Meaning of indifference curve

An Indifference Curve (IC) is a locus representing different combinations of two goods (say X and Y) which give the consumer equal utility or satisfaction. IC slopes downwards to the right as a rectangular hyperbola. It is due to the operation of a law of diminishing marginal rate of substitution, MRS. In fact, the indifference curve is a curve showing equal satisfaction in a different combination of goods. Every point given on indifference curve represents different combination. It is, therefore, a matter of indifference for the consumer whether he chooses one combination or the other. The consumer is found as indifferent between all such combinations which represent the same level of satisfaction. The indifference curve is also known as an “Equal satisfaction Curve” as well as "Iso-utility Curve.”

Assumptions of indifference curve

The concept of an indifference curve is based on following assumptions:

  • Two wants are satiable at a time
  • Consumer must be rational
  • Ordinal measurement of utility is possible
  • It is also assumed that consumer's choices are characterized by transitivity.
  • A consumer has non-satiety nature.
  • There is operation of law of diminishing marginal rate of substitution
  • A consumer has a scale of preferences.

 

An indifference curve derived from the following indifference schedule.

                                   Indifference Schedule

Combinations of Good X and Good Y

Good X

Good Y

Satisfaction (Units)

A

5

9

100

B

10

6

100

C

15

4

100

D

20

3

100


The indifference schedule is based on the assumption that only two goods of utility (i.e. Good X and Good Y) for producing the same level of satisfaction (i.e. 100 units).

At 'A' combination = 9X + 5Y = 100 units of satisfaction

At 'B' combination = 6X + 10Y = 100 units of satisfaction

At 'C' combination = 4X + 15Y = 100 units of satisfaction

At 'D' combination = 3X + 20Y = 100 units of satisfaction

The combinations 'A', 'B', 'C' and 'D' shows the level of satisfaction or utility (i.e. 100 units) by consuming by applying different combinations of Good X and Good Y. Thus, an isoquant schedule is a schedule of various combinations of the two commodities that will equally be acceptable to the consumer because those combinations which yield the same level of satisfaction.

An indifference curve is the graphical representation of an indifference schedule.

Thus, an indifference curve is a curve that shows all combinations of Good X and Good Y which yield the same level of satisfaction.

 

Indifference curve
                        Fig. Indifference curve

Indifference Map

By plotting several indifference schedules in the same set of a graph, we derive indifference map. The entire set of indifference curves is called an indifference map and reflects the entire set of tastes and preferences of the consumer. A higher indifference curve refers to a higher level of satisfaction and lower indifference curve to less satisfaction because if the consumer shifts to the right from one indifference curve to another, he gets more of or both the commodities.

Indifference map
                       Fig. Indifference map

 

Isoquants Vs Indifference Curves

The properties of isoquants are similar as the properties of indifference curves. But they are slightly different. Indifference curve technique represents different combinations of two goods yielding the same level of satisfaction, whereas, isoquants represent different combinations of inputs i.e. labor and capital producing the same level of output. Indifference curve represents immeasurable utility (or satisfaction), an isoquant represents a measurable quantity.

Properties of Indifference curve

1. Higher indifference curve yields a higher level of satisfaction than lower one 

This is due to the facts that more units of both goods are consumed on the higher indifference curve. In the figure, the points A and B lie on the indifference curve IC1 and IC2 respectively. We have OY1 units of good Y and OX1 units of good X at point A. And we have OY1 units of good Y and OX2 units of goods X at point B. Here, the amount of good Y (OY1) is the same at both the point A and B. But at point B is having X1X2 units of good X more. Hence, it will yield a higher level of satisfaction.

 

Figure: Properties 1

2. Two indifference curve cannot cut each other 

Two indifference curve also cannot cut each other. If they intersect or cut each other, then we will get an inconsistent result and there would be a contradiction. In the figure, the indifference curve IC1 shows 100 units of satisfaction and IC2 shows 100 units of satisfaction produced by various combinations of good X and good Y in the curve. At point A, there is inconsistent. Hence, indifference curve cannot intersect each other.

Properties 2 of IC

3. Indifference curves are convex to the origin 

Due to the operation of the principle of diminishing marginal rate of substitution, indifference curve always be convex to the origin. MRS is the defined as the rate at which marginal utilities of one good can be substituted for another good. But the level of satisfaction remains the same or constant. In the figure, as the consumer moves from point A to B, from B to C and C to D in the indifference curve IQ1, the marginal rate of technical substitution (MRTS) of good X for good Y diminishes or decreases. Since the two goods are not substitutes, the MRTS diminishes. In the figure, in each and every increase in good X by (ΔX), this will result in a decrease in the corresponding units of good Y (ΔY). Hence, MRTS must diminish, the indifference curve is always convex to the origin.

 

Properties 3 of IC
 

4. Indifference curves are negatively sloped 

An indifference curve slopes downwards from toward right. The reason behind is the principle of diminishing marginal rate of substitution. In order to maintain the same level of satisfaction, a reduction in the consumption of one good must be offset by an increase in the consumption of another good. In the figure, it shows that when the consumer moves from point A to B, the consumption of good X labor increases, but the units of good Y decreases, to maintain the same level of satisfaction or the utility. The impossibility of horizontal, vertical or upward sloping indifference curve can be shown with the help of the following diagrams.

 

Properties 4 of IC

Reference

Koutosoyianis, A (1979), Modern Microeconomics, London Macmillan

 

 

  • An indifference curve is a locus representing different combinations of two goods (say X and Y) which give the consumer equal utility or satisfaction.
  • IC slopes downwards to the right as a rectangular hyperbola.
  • An isoquant schedule is a schedule of various combinations of the two commodities that will equally be acceptable to the consumer because those combinations which yield the same level of satisfaction.
  • The entire set of indifference curves is called an indifference map and reflects the entire set of tastes and preferences of the consumer.
  • The properties of indifference curves are:
    • Higher indifference curve yields a higher level of satisfaction than lower one 
    • Two indifference curves cannot cut each other.
    • Indifference curves are convex to the origin.
    • Indifference curves are negatively sloped.
.

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