Indifference Curve

1. INDIFFERENCE CURVE ANALYSIS
by
Dr. S. Janakiraman
Assistant Professor of Economics
Government Arts College (Autonomous),
Coimbatore.

2. Utility
The satisfaction or pleasure a
consumer derives from the
consumption or possession of a
good (or service) or an activity (or
lack thereof), over a certain span of
time.

3. Diminishing Marginal Utility
U
X
U = f (X)

4. Marginal Utility
MU
X
0
Change in U U
MU x = -------------------- = -----------
Change in X X

5. Prelude to Indifference
discussion
Marginal utility analysis requires some
numerical measure of utility in order to
determine the optimal consumption
combinations
Economists have developed another, more
general, approach to utility and consumer
behavior
This approach does not require that numbers
be attached to specific levels of utility

6. INDIFFERENCE CURVES AND UTILITY
MAXIMIZATION
• All this new approach requires is that
consumers be able to rank their
preferences for various combinations of
goods
• Specifically, the consumer should be able
to say whether
– Combination A is preferred to combination B
– Combination B is preferred to combination A.
or
– Both combinations are equally preferred

7. An Indifference Curve:
Definition
• An indifference curve is a curve showing all
the quantity mixes of two goods from which
the consumer derives the same level of
utility.
• An indifference curve is convex to the
origin, reflecting the principle of
diminishing marginal utility.
• The slope of an indifference curve measures
the marginal rate of substitution, MRS.

8. Consumer Preferences
• Indifference curve shows all
combinations of goods that provide the
consumer with the same satisfaction, or
the same utility
• Thus, the consumer finds all
combinations on a curve equally
preferred
• Since each of the alternative bundles of
goods yields the same level of utility, the
consumer is indifferent about which
combination is actually consumed

9. Indifference Curves
• Indifference curves are also convex
to the origin  they are bowed
inward toward the origin
• The curve gets flatter as you move
down it

10. Marginal Rate of Substitution
• Definition: The rate at which a
consumer is willing to substitute one
good for another good while remaining
at the same level of satisfaction. That is
the amount of good X needed to replace
one unit of (lost) good Y to keep the
consumer’s level of satisfaction (utility)
unchanged.
• MRS = Slope of the indifference curve

11. U
0
Y
X
MRS
MRS

12. Marginal Rate of Substitution
• The law of diminishing marginal rate of
substitution says that as a persons
consumption of pizza increases, the
number of videos that they are willing to
give up to get another pizza declines
• This implies that the indifference curve
has a diminishing slope  as we move
down the indifference curve, the
consumption of pizza increases and the
marginal utility of additional pizza
declines

13. The principle of diminishing
marginal utility:
• As a consumer consumes more
and more of a good, beyond a
certain level, the utility of each
additional unit of it (marginal
utility) begins to decrease.
• As a consumer consumes more
and more of a good, beyond a
certain level, each additional unit
of that good becomes less dear to
him/her

14. Indifference Map
• We can use the same approach to
generate a series of indifference curves,
called an indifference map  graphical
representation of a consumer’s tastes
• Each curve in the map reflects a different
level of utility

15. Utility and Indifference Curves
0
10
20
30
40
50
60
70
80
0 5 10 15
Music CDs
Live
Concerts
A INDIFFERENCESCHEDULE
Lv. Conc Msc.CDs
10 2
9 3
8 5
7 8
6 12
5 18
4 26
3 36
2 50
1 70
U1 U2
U3
U4

16. Properties of Indifference Curves
• A particular indifference curve
reflects a constant level of utility
• If total utility is to remain constant, an
increase in the consumption of one
good must be offset by a decrease in
the consumption of the other good 
indifference curves slope downward
• Higher indifference curves represent
higher levels of utility

17. Properties of Indifference Curves
• Because of the law of diminishing
marginal rate of substitution, indifference
curves are bowed in toward the origin
• Indifference curves do not intersect
• Indifference curves are a graphical
representation of a consumer’s tastes for
the two goods

18. Why Indifference Curves
Cannot Cross
If indifference
curves crossed, it
would violate the
“prefer-more-to-
less” principle.

19. Budget Line
• A line showing all combinations of the
quantities of two goods a consumer can
buy with a given amount of income
(budget).
• Assuming a consumer is spending all her
income on two (symbolic) consumer
goods: CDs and live concerts,
Income = Pc . Qc + PL . QL
Pc = 15 , PL = 120 , Income = 1200
CD intercept = 80 LC intercept = 10

20. CDs
LC
80
105
0
Slope of budget line = - ---------
Pc
PL
= -------- = 8
120
15

21. Summary
• The indifference curve indicates what the
consumer is willing to buy
• The budget line shows what the
consumer is able to buy
• When the indifference curve and the
budget line are combined, we find the
quantities of each good the consumer is
both willing and able to buy