BE/U2 Topic 5 Indifference Curves
An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility. Each point on an indifference curve indicates that a consumer is indifferent between the two and all points give him the same utility.
An Indifference Map is a set of Indifference Curves. It depicts the complete picture of a consumer’s preferences. The following diagram showing an indifference map consisting of three curves:
We know that a consumer is indifferent among the combinations lying on the same indifference curve. However, it is important to note that he prefers the combinations on the higher indifference curves to those on the lower ones.
This is because a higher indifference curve implies a higher level of satisfaction. Therefore, all combinations on IC1 offer the same satisfaction, but all combinations on IC2 give greater satisfaction than those on IC1.
Properties of an Indifference Curve or IC
Here are the properties of an indifference curve:
- An IC slopes downwards to the right
This slope signifies that when the quantity of one commodity in combination is increased, the amount of the other commodity reduces. This is essential for the level of satisfaction to remain the same on an indifference curve.
- An IC is always convex to the origin
From our discussion above, we understand that as Peter substitutes clothing for food, he is willing to part with less and less of clothing. This is the diminishing marginal rate of substitution. The rate gives a convex shape to the indifference curve. However, there are two extreme scenarios:
- Two commodities are perfect substitutes for each other – In this case, the indifference curve is a straight line, where MRS is constant.
- Two goods are perfect complementary goods – An example of such goods would be gasoline and water in a car. In such cases, the IC will be L-shaped and convex to the origin.
- Indifference curves never intersect each other
Two ICs will never intersect each other. Also, they need not be parallel to each other either. Look at the following diagram:
Fig shows tow ICs intersecting each other at point A. Since A and B lie on IC1, the give the same satisfaction level. Similarly, A and C give the same satisfaction level, as they lie on IC2. Therefore, we can imply that B and C offer the same level of satisfaction, which is logically absurd. Hence, no tow ICs can touch or intersect each other.
- A higher IC indicates a higher level of satisfaction as compared to a lower IC
A higher IC means that a consumer prefers more goods than not.
- An IC does not touch the axis
This is not possible because of our assumption that a consumer considers different combinations of two commodities and wants both of them. If the curve touches either of the axes, then it means that he is satisfied with only one commodity and does not want the other, which is contrary to our assumption.