Indifference Curve: Concept, Properties & Shapes

The indifference curve is defined as the locus of the points of the different combinations of different goods, which gives an equal level of satisfaction to the consumer.

Therefore a consumer is indifferent between any of the combination which lies on the same indifference curve. This happens because the consumer has the power to substitute among various goods, given their prices and his income level.

For simplicity, let’s take the example of two goods x and y. Now given the income of the consumer and the prices of x and y, the consumer can choose different combinations of x and y to be consumed in order to maximize his satisfaction. All those combinations of x and y, which gives an equal utility to the consumer, form an indifference curve (as in the following fig).

Moreover, the consumer can substitute between x and y and thus can either consume more of x or more of y but the main point is that the level of satisfaction arising from the different combinations of x and y remains the same to him.

As has been depicted in the above figure, that at point ‘a’ the consumer consumes y₃ and x₁ combination of goods, whereas at point ‘b’, he substitutes y with x and the combination at point ‘b’ becomes x₂ and y₂, similarly at point ‘c’ the consumer consumes x₃ and y₁ combination of both the goods, given his income and Px and Py.

However, all points a, b and c give the consumer an equal level of satisfaction. Hence, he is indifferent among a, b and c. Therefore, the curve joining a, b and c are known as the indifference curve, where the consumer is indifferent to the different choice which he has as they all gives him an equal level of satisfaction.

Here only the combinations of x and y are different at each point, but the level of satisfaction which the consumer obtained from them is the same.

Now if the consumer either consumes more of a good or of both goods, then he would be able to increase his level of satisfaction, and thus a new IC would be drawn above this IC, which represents the different combinations of x and y (higher than the previous combinations) which gives him the same level of satisfaction (higher than the previous level of satisfaction).

Similarly, a lower IC would represent the combinations of x and y (lesser than the previous combinations) which gives him equal satisfaction (lesser than the previous level of satisfaction).

Hence the higher the IC, the higher the level of satisfaction, and the lower the IC, the lesser the level of satisfaction obtained by the consumer.

Representation of the different combinations of goods and different levels of satisfaction on a graph is known as an Indifference map.

Concept of Marginal Rate of Substitution

The marginal rate of substitution is defined as the rate at which a consumer substitutes one good for the other, obtaining the same level of satisfaction. In this case, it is the rate at which a consumer substitute good y with good x in order to get the same level of satisfaction.

Symbolically,

MRSyx = ∆y/∆x or MRSxy = ∆x/∆y

MRS is also known as the slope of the IC.

As we can see from the diagram below, that as the consumer consumes more of x, he reduces the quantity of y from y₃ to y₂ in order to get the same level of satisfaction.

Similarly, he further substitutes y from y₂ to y₁ with good x in order to get more of x and the same level of satisfaction. This rate of change in y due to the increase in the quantity of x by one unit is known as the Marginal Rate of Substitution (MRS).

As we can see, an IC has a diminishing MRS, which means that the consumer substitutes x for y at a diminishing rate.

In other words, as the consumer increases the consumption of x by one unit, their consumption of y reduces at a decreasing rate. Hence we can say that an IC has a diminishing slope.

As we can see that ∆x₁ = ∆x₂ = ∆x₃ = ∆x₄ but ∆y₀ < ∆y₁ < ∆y₂ < ∆y₃. This MRS falls because of the following reasons:

• Diminishing MU
• The decline in the ability of the consumer to sacrifice a commodity whose quantity goes on declines.

Properties of Indifference Curve

• The indifference curve has a negative slope because of the diminishing MRS.
• The indifference curve never intersects with each other else; they will break the assumption of transitivity.
• The indifference curve is convex to the origin of the imperfect substitute goods.
• A higher indifference curve represents a higher level of satisfaction.

Different Shapes of Indifference Curves

1. Substitute Goods: Substitute goods are those goods which give the same utility to the consumers, i.e. they can be substituted in place of their related good as they possess almost the same characteristics as their related good.

In other words, two goods are considered as substitute goods for one another when the utility derived from both of them is the same. For instance, wheat and rice, coke and Pepsi etc.

Therefore the MRS between substitute goods is constant as ∆y=∆x, so MRS = ∆y/∆x. In this case, we can write MRS = ∆x/∆x (because ∆y=∆x). Therefore, MRS = 1.

Graphically:

2. Complimentary Goods: Complimentary goods are those goods which are consumed in fixed proportions like pen and refill, left socks and right socks, car and petrol etc. In such a case, if we even increase the quantity of one good, the quantity of the other good does not increase. Hence, MRS = 0.

Symbolically, MRS = ∆y = ∆x. But in such a case, ∆y = 0, ∆x = 1. Thus, MRS = 0/1 = 0.

Graphically,

3. One Good is Necessary: In case of one good is a necessary good without which we cannot survive, like water, then in such a case, the shape of the IC would be like follows:

4. In case of a BAD Good: A bad good is defined as a good whose excess is bad for consumption, i.e. if the consumer consumes more of it, then his utility would decrease, for instance, cigarette (for a mediocre or non-smoker). In such a case, the shape of the IC is as follows:

Hint: In order to draw an IC, always find out the worst point of both the goods and then bend the IC towards that common worst point. In this case, the worst of y is 0. However, the worst of BAD is the excess. Therefore, the IC bend away from 0 towards the x-axis.

5. In the case of a Neutral Good: Neutral goods are those goods which neither yield utility nor disutility to its consumers. Thus a consumer is indifferent to its consumption. In such a case, the IC will be a straight line, as shown below.

6. A Good Turns Bad after Some Point: If a good is a normal good till some point and then after that point, it becomes bad for its consumer, i.e. it provides utility to its consumer till some point, but after that point, if the consumer still consumes it then it starts providing disutility to him then in such a case the IC will be like:

Read More- Microeconomics

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2. Methods of Analysis in Economics
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4. Concept of Market & Market Mechanism in Economics
5. Concept of Demand and Supply in Economics
6. Concept of Equilibrium & Dis-equilibrium in Economics
7. Cardinal Utility Theory: Concept, Assumptions, Equilibrium & Drawbacks
8. Ordinal Utility Theory: Meaning & Assumptions
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10. Budget Line: Concept & Explanation
11. Consumer Equilibrium: Ordinal Approach, Income & Price Consumption Curve
12. Applications of Indifference Curve
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14. Normal Goods: Income & Substitution Effects
15. Inferior Goods: Income & Substitution Effects
16. Giffen Paradox or Giffen Goods: Income & Substitution Effects
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