Indifference Curve: Properties and More

An indifference curve represents a graph showing combinations of two goods that provide a consumer with equal levels of satisfaction and utility, illustrating the concept of consumer preference. The curve slopes downward, indicating that as the quantity of one good increases, the quantity of the other must decrease to maintain the same level of utility.

The indifference curve is a locus of points, each showing a different combination of two substitutes, yielding the same level of utility to a consumer. If consumers have to decide between two commodities, they are indifferent to any combination of products. This is why an individual consumes various goods over time and realizes that one good can be substituted without compromising satisfaction. Here we will learn more about the indifference curve and properties of the indifference curve.

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Table of Content 

• What is the Indifference Curve?
• What is Utility?
• The Principle of Diminishing Marginal Utility
• What is the Formula to Calculate Indifference Curve?
• What Does Indifference Curve Explain?
• Criticism Of The Indifference Curve 

What is the Indifference Curve?

In microeconomics, an indifference curve (IC) is a graph representing the combination of two goods that gives consumers the same level of satisfaction and utility. Consumer prefers all the combinations equally as they give them the same level of satisfaction. As at each consumption bundle, an individual is indifferent; it is said to be an Indifference Curve. Other names of indifference curve are also called the iso-utility curve or equal utility curve.

What is Utility?

Utility is the benefit or dissatisfaction derived from consuming any good or service. Consumer preferences are defined by the consumption bundle derived from what customers face. Customers always try to maximize their utility based on rational choice.

The Principle of Diminishing Marginal Utility

The law of diminishing Marginal utility implies that if a person consumes the same kind of product, the satisfaction or utility they get from that particular product diminishes as they consume more and more. 

For example, if you buy a particular type of chips for a while. After some time, you will realize that you will no longer find the chips that tasty, and you will switch to other alternatives. It is because the satisfaction you were getting earlier from chips is diminishing. 

What are the Properties of the Indifference Curve?

Indifference curves assume that individuals have predictable, ordered preferences and aim to maximize utility. Thus, it will have the following three characteristics:

A good is considered a common good if it satisfies all three Indifference Curve properties. They can be summed up as follows:

1. Negatively sloped and convex to the origin

The indifference curve has a rightward declining slope. The rationale for the negative slope is that as consumers raise their consumption of commodity X, they must give up some units of commodity Y to have the same combination level. Additionally, ICs are convex to the origin because they are concave inwards. The MRS of X and Y declines as the consumer keeps replacing commodity X with commodity Y.

2. Higher IC shows a higher level of satisfaction

When one IC lies above and to the right of another IC, it implies higher satisfaction and vice versa. As a result, the consumer prefers the combination of commodities on the higher IC to the combination on the lower IC. 

3. The indifference Curve does not Intersect

This can be explained in a hypothetical situation where two indifference curves intersect. The point of intersection implies that a combination of commodities on the higher curve offers the same level of satisfaction as that on the lower difference curve, which violates the basic assumption of ICs. Hence, ICs cannot intersect each other. 

What is the Formula to Calculate Indifference Curve?

The formula used to create an IC is as follows:

U (t,y) = C

Where, 

c is the utility achieved on the curve is constant. 

T,y are the different quantities for two different goods, t, and y. 

What does Indifference Curve Explain?

When people come across two products they want to purchase, they often consider tradeoffs, which economists explain using an indifference curve. People cannot buy everything since they have a limited budget. It is instead necessary to conduct a cost-benefit analysis. It visually represent this tradeoff by displaying the quantities of two alternative products that give a consumer the same utility (i.e., where they remain indifferent).

Let’s learn the IC through a schedule. Assuming that a consumer consumes two commodities, Pizza and Coldrink make three combinations for these commodities a, b, and c. 

Refer to the following table.

There can be several positions between A, B, and C on the indifference curve (IC) that could produce the same amount of consumer satisfaction. Because of this, the consumer remains indifferent toward any combination of two substitutes that produces the same satisfaction.

Criticism Of The Indifference Curve

The concept of IC is criticized on various grounds. Let’s understand them:

1. Ignorance toward market behavior
2. Two Commodities Model
3. Ignorance towards demonstration effect
4. Indifference toward risks and uncertainties
5. Unrealistic assumptions