Indifference Curves Overview, Diminishing Marginal Utility, Graphs

Many core principles of microeconomics appear in indifference curve analysis, including individual choice, marginal utility theory, income, substitution effects, and the subjective theory of value. Indifference curve analysis emphasizes marginal rates of substitution (MRS) and opportunity costs. Indifference curve analysis typically assumes that all other variables are constant or stable.

The indifference curves have a number of attributes and interesting properties which have come to be known as characteristic features or properties of indifference curves. Here, f(x) represents a function of good x, which describes the relationship between the quantities of goods x and y that yield the same utility level. In order to explain his approach, Hicks made use of his indifference curves’.

Perfect Substitutes

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. All points or bundles on an indifference curve that gives the same level of satisfaction to the consumer are known as Indifference Set. An indifference curve (IC) is a graphical figure which shows the curve line for two combinations of assets or goods in different quantities, providing satisfaction to the buyer in an equal manner. In this diagram at P, the consumer obtains OM of oranges and ON of bananas. Thus it is proved that an Indifference Curve cannot slope upward to the right, nor can it be horizontal or vertical. The only possibility is that it must slope downwards to the right.

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. Different values of c correspond 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. Some would argue that the concept of indifference is conceptually incompatible with real-life economic action.

Characteristics of Indifference Curve

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. If the marginal rate of substitution had increased, the Indifference Curve would have been concave to the origin. If the marginal rate of substitu­tion had remained constant, the Indifference Curve would have been a diagonal straight line at 45° angle.

Now the consumer travels down the indifference curve and comes to point B where he has ox1 units of x and oy1 units of y. The marginal significance of x in terms of y at this new point is given by the tangent of the angle BLO. Since angle BLO is greater than the angle AKO, it follows that the marginal significance of x is greater at point ‘B’ on the curve and the marginal characteristic of indifference curve significance of x is smaller at point A on the curve. The very important feature of the indifference curves is that they are convex to the origin and they cannot be concave to the origin. A normal indifference curve will be convex to the origin and it cannot be concave. Only convex curves will lend to the principles of Diminishing Marginal Rate of substitution.

Money and Banking Class 12 Notes PDF

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. When more than one curve is represented on a graph showing a different combinations of two different goods on each curve, it is known as an Indifference Map. Each indifference curve on that graph shows one satisfaction level all along the curve.

Indifference curves, like many aspects of contemporary economics, have been criticized for oversimplifying or making unrealistic assumptions about human behavior. For example, consumer preferences might change between two different points in time, rendering specific indifference curves practically useless. Other critics note that it is theoretically possible to have concave indifference curves or even circular curves that are either convex or concave to the origin at various points. On each of the indifference curves, the consumer is indifferent to the combinations of the two products.

What is an Indifference Curve Table Explanation Characteristics

In this section, we look at a particular utility function that is often used in economic modelling. We derive expressions for the marginal utilities and the marginal rate of substitution, and verify their properties. Drawing indifference curves for perfect substitutes is straightforward, as shown in figure 1.7. The indifference curve is based on the assumption that a consumer considers different possible combinations of two goods and wants both goods.

The marginal significance of x cannot be greater if the consumer travels dawn the curve enabling him to possess more of x commodities. The marginal significance of x should become smaller and smaller as he possesses larger and larger quantities of x. Since a concave curve violates the fundamental principle of economics, the indifference curve cannot be concave.

What is Indifference Curve ?

In other words, is offering a subsidy to consumers the most effective way to meet the policy goals of decreased dependency on foreign oil and carbon emissions? Are there more efficient—that is, less expensive—ways to achieve these goals? The ability to predict with some accuracy the response of consumers to this policy is vital to determining the merits of the policy before millions of federal dollars are spent.

• These curves can be used in welfare economics via marginal utility theory.
• 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.
• Indifference curves are generally downward sloping and convex to the origin.
• The MRSXY is the rate of change in one commodity (y) in relation to one unit change in the other commodity (x).

It represents more of both goods than bundle [latex]C[/latex], which lies on the other indifference curve. Bundle [latex]B[/latex] also represents more of both goods than bundle [latex]D[/latex], and therefore [latex]B[/latex] should be preferred to [latex]D[/latex]. However, [latex]D[/latex] is on the same indifference curve as [latex]A[/latex], so [latex]B[/latex] should be preferred to [latex]A[/latex].