Indifference Curve

 Subject : Microeconomics
 Subject Code : Eco - 101
 Class : M.Sc. Economics
( 1stYear )
 Session : 2018-2020
 Professor : Dr.Vanita Ahlawat
 Topic : Indifference Curve
Analysis.
 Submitted By : Nancy (Roll no. 07)

 1. Invention.
 2. Definition.
 3. Assumption.
 4.Indifference Curve Approach.
 5. Indifference schedule, curve, map.
 6.Diminishing Marginal Rate of Substitution.
 7. Properties of Indifference Curve.
 8.Indifference Curve of Perfect substitute and Perfect
Complements.
 9. Budget Line.
 10.Consumer’s Equilibrium.

J.R. Hicks and R.G.D. Allen
 “Reconsideration of theTheory of Value”.
 Gave Indifference Curve approach based on notion
ordinal utility to explain consumer’s behavior.
 Hicks (1939) reproduce Indifference Curve theory of
consumer’s demand in “Value and Capital”.

 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

 1.Capable of ranking goods in terms of preference
for them.
 2.Transitivity.
 3. More of a commodity is better than less.
 4. Diminishing Marginal Rate of Substitution.

 1. Ordinal Utility: it implies that the consumer is capable
of simply comparing the different levels of satisfaction.
 2. Notions of Preference and Indifference: the concept of
ordinal utility implies that the consumer can’t go beyond
stating his preference or indifference.
*Note:- the consumer formulates his scale of preferences
independently of the market prices of goods keeping in view
only the satisfaction which he hopes to get from various
combinations of goods.*

An indifference schedule may be defined as a
schedule of various combinations of two
goods that will be equally acceptable to the
consumer.

Commodity I Commodity II
Good X GoodY Good X GoodY
1 12 2 14
2 8 3 10
3 5 4 7
4 3 5 5
5 2 6 4

GoodY
Good X
Y
X
Yes! I know that how
to use my money more
efficiently….
*Indifference curve is the graphical representation of Indifference
Schedule*
O
A
B
C
D
E
y1
y2
y3
y4
y5
x1 x2 x3 x4 x5

 Indifference Map : It is a complete description of
consumer’s tastes and preferences can be represented
by an Indifference Map which consists of a set of
indifference curves.

GoodY
Good X
Y
X
Ic1
IC2
IC3
IC4
IC5
O

The marginal rate of substitution (MRS) is the rate at
which a consumer can give up some amount of one good
in exchange for another good while maintaining the same
level of utility.
MRS= ( Y)/( X)
{ Y= Change inY
X= Change in X}

Combination Good X GoodY MRS (XY)
A 1 12 ____
B 2 8 4
C 3 5 3
D 4 3 2
E 5 2 1

t
Y
o
∆Y
∆XS
A
B
T
IC
X
GoodY
Good X




X
Y
SB
AS
MRSXY
Tangent of the angleABS.

An important principle of economic theory is that as
consumer has more and more of good X, he is
prepared to forego less and less of goodY.

GoodY
Y(A) (B)
(Diminishing marginal rate of substitution)

 1. The want for a particular good is satiable so that
as the consumer has more and more of a good the
intensity of his want for that good goes on
declining.
 2.The goods are imperfect substitute of each other.

 1. Indifference curve slopes downwards to the right:
(It can’t be a horizontal
straight line)
(It can’t be a vertical line) (It can’t be a slope upward)
GoodY
Good X Good X Good X
GoodY
GoodY

 2. Indifference Curve are convex to the origin:
GoodY
GoodY
GoodY
Good X Good X Good X
(It can’t be generally concave to the origin) (Except in case of perfect
substitutes an It can’t be a
straight line.)
A
B
C
D

 3. Indifference curve can’t intersect each other:
GoodY
Good X
Y
X
S
R
Q
M N
A
B
C
IC1
IC2

 4. A higher Indifference Curve represents a higher
level of satisfaction than a lower Indifference Curve:GoodY
Good X
Y
X
IC1
IC2
S
Q
O

 When two goods are perfect substitute of each other the
indifference curve is a straight line on which marginal rate of
substitution remains constant.
GoodY
Y
Good X X
IC1
IC2
IC3
O
(Indifference curve of Perfect Substitution)

 Complements are those goods which are used jointly in
consumption so that their consumption increases or
decreases simultaneously. E.g.: left shoe and right shoe.
GoodY
Good X
Y
XO
IC1
IC2
IC3
3 6 9
2
4
6

 Important Points:
1. Budget line is essential for understanding the theory of
consumer’s equilibrium.
2. To reach highest possible indifference curve and get
maximum satisfaction, consumer has to work under two
constraint:
 He has to pay the prices for the goods .
 He has a limited money income with which to purchase the
goods.

 Definition:
The budget line can be defined as a set of
combinations of two commodities that can be purchased of
whole of a given income is spent on them at a given price.
 Algebraic Form:
and denote prices of goods X and Y respectively and M
stands for money income.
MYPXP YX 
XP YP

 Definition:
It represents the opportunity set for the
consumer, that is, all those combinations of two
commodities which he can buy, given his budget constraint.
 Algebraic Expression:
MYPXP YX 

Budget line equation= MPP YX 
Budget space
equation=
MYPXP YX 
X
Y
O
GoodY
Good X
B
L
H unattainable

 Change in price and shift in budget line:
Good X
GoodY
O
Y
XL
B
L” L’
{ Explanation:
With the fall in price of good X, the other
things remaining unchanged , the consumer can buy
more of X with the given money income and therefore
budget line BL will shift to BL’.
Similarly, with the rise in price of good X, the other
things remaining unchanged, the consumer can buy
less of X with the given money income and therefore
budget line will shift to BL”.}
1.

 Change in income and shift in budget line:
B’
B”
L” L’
{ Explanation:
If the consumer’s income increases while
other things remains constant, the price line
shifts upward and is parallel to the original
budget line.
Similarly, if income of the consumer
decreases, the other things remaining
unchanged, the budget line shifts downwards
but remains parallel to the original price line.}

 Slope of a budget line is equal to the ratio of the
prices of two goods.
Here, slope of the budget line BL is OB/OL.
Y
X
P
P
OL
OB
BL 
xP
M
YP
M

 A consumer is said to be in equilibrium when he is
buying such a combination of goods that leaves him
with no tendency to rearrange his purchase of goods.
 In other words, consumer is
assumed to be rational in the
sense that he aims at
maximizing his
satisfaction.

 The consumer has a given indifference map exhibiting his
scale of preferences for various combinations of two goods,
X andY.
 He has a fixed amount of money to spend on the goods. He
has to spend whole of his given money on the two goods.
 Prices of the goods are given and constant for him. He
cannot influence the prices of the goods by buying more or
less of them.
 Goods are homogeneous and divisible.

 The consumer will choose that combination on the budget
line which lies on the highest possible Indifference curve.
 The highest indifference curve to which the consumer can
reach is the indifference
curve to which the budget line
is tangent.
IC1
IC2
IC3
Q
S
R

{note: At the tangency point Q, the slopes of the budget line
BL and IC2 are equal. Slope of the indifference curves shows
the marginal rate of substitution of X for Y, while the slope of
the budget line indicates the ratio between the prices of two
goods Px/Py.Thus at the equilibrium point:
MRSxy= (Px/Py).}

*Conclusion:
We can therefore express the condition for
the equilibrium of the consumer by either saying that the
given budget line must be tangent to the indifference curve,
or the marginal rate of substitution of good X for good Y
must be equal to the ratio between the prices of the two
goods.

Indifference Curve

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