What is an indifference curve?
An indifference curve, relative to two products, is a graph showing the combinations of the two products that leave the consumer equally well off or equally satisfied – therefore indifferent – to have a combination on the curve.
Indifference curves are heuristic devices used in contemporary microeconomics to demonstrate consumer preferences and budget limitations. Economists have adopted the principles of indifference curves in the study of welfare economics.
Key points to remember
- An indifference curve shows a combination of two goods which give a consumer equal satisfaction and usefulness, thus rendering the consumer indifferent.
- Along the curve, the consumer has an equal preference for the combinations of goods shown, i.e. he is indifferent to any combination of goods on the curve.
- Typically, indifference curves are shown convex to the origin, and no indifference curve ever intersects.
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Understanding an indifference curve
The standard indifference curve analysis works on a simple two-dimensional graph. Each axis represents a type of economic good. Along the indifference curve, the consumer is indifferent to any of the combinations of goods represented by dots on the curve because the combination of goods on an indifference curve provides the same level of utility to the consumer.
For example, a young boy might be indifferent between owning two comics and a toy truck, or four toy trucks and a comic, so those two combinations would be points on a young boy’s indifference curve.
Analysis of the indifference curve
Indifference curves work under many assumptions; for example, each indifference curve is generally convex about the origin, and no indifference curve ever intersects. Consumers are always assumed to be more satisfied when they bundle goods on indifference curves farther from the origin.
As income increases, an individual will generally change their level of consumption because they can afford more products, with the result that they will end up on an indifference curve farther from the origin and therefore better off. .
Many fundamental principles of microeconomics emerge in indifference curve analysis, including individual choice, marginal utility theory, income, substitution effects, and subjective value theory. The indifference curve analysis focuses on marginal rates of substitution (MRS) and opportunity costs. Analysis of the indifference curve generally assumes that all other variables are constant or stable.
Most economics textbooks rely on indifference curves to introduce the optimal choice of goods for any consumer according to his income. Classical analysis suggests that the optimal consumption package takes place at the point where a consumer’s indifference curve is tangent to his budget constraint.
The slope of the indifference curve is known as the MRS. The SRM is the rate at which the consumer is willing to give up one good for another. If the consumer values apples, for example, the consumer will be slower to abandon them for oranges, and the slope will reflect this rate of substitution.
Criticisms and Complications of the Indifference Curve
Indifference curves, like many aspects of contemporary economics, have been criticized for oversimplifying or unrealistic assumptions about human behavior. For example, consumer preferences can change between two different times, making specific indifference curves virtually unnecessary.
Other critics note that it is theoretically possible to have concave indifference curves or even circular curves originally convex or concave at various points. Consumer preferences can also change between two different times, making specific indifference curves virtually unnecessary.