An indifference curve is a curve on which all the combinations of two commodities give a consumer equal satisfaction. A consumer is indifferent towards different combinations located on such a curve.
The scale of preferences implies that a consumer can conveniently arrange the various combinations of two or more goods available to him in order of his preferences.
Indifference curve analysis seeks to remedy this shortcoming of utility analysis.
It tries to solve how a consumer reaches the equilibrium point without measuring the utility in Cardinal numbers.
An Indifference curve is a geometrical representation of a consumer’s scale of preferences.
Any number of combinations of the commodities X and Y located on an indifference curve will show a similar level of satisfaction to the consumer.
An Indifference curve is a curve that represents all those combinations of goods that give some satisfaction to the consumer.
It is the locus of the point representing pairs of quantities in between which the individual is indifferent so it is termed an indifference curve.
What are the Properties of Indifference Curve with Diagrams?
We can make certain realistic assumptions about the shape of the Indifference curves. This assumption is termed the property of indifference curves.
Some of these important properties of the indifference curve are as follows:
1. All Combinations on an Indifference Curve Give the Same Level of Satisfaction
As we defined the indifference curve gives the same level of satisfaction with the different points of combinations of two commodities A, B, C, D, and E combinations.
The diagram clearly shows and clarifies the characteristics of an indifference curve.
2. A Higher Indifference Curve Shows a Higher Level of Satisfaction
Another characteristic of the indifference curve is that hire the indifference curve higher will be the level of satisfaction.
It has been so and diagrams were IC, ICI1, IC2, and IC3 indifference curves so different levels of satisfaction from the point of the level of satisfaction.
They can be put in the order of preference like IC3>IC2>IC1>IC respectively.
3. Indifference Curves always Slope Downwards from Left to Right
An Indifference curve is definite as a curve on which all the combinations of two commodities give a consumer equal satisfaction.
It follows that if a consumer wants to have more quantity of commodity X, he will have to give up some quantity of commodity Y in order to derive the same level of satisfaction.
If a consumer could have more of one commodity without a corresponding fail in other commodities he would have achieved a higher level of satisfaction.
Plotting on a graph the different combinations that contain more of one commodity and less of another would give a downward-sloping curve.
There are many types of disequilibrium in the balance of payments.
4. Indifference Curves Never Cut Each Other
The reasoning behind this assumption is that:
(1). Each indifference curve represents a different level of satisfaction.
(2). Each point on an indifference curve gives a level of equal satisfaction.
Hence, no point In two different indifference curves can be common to each; The two curves will have to be perfectly independent of each other.
5. An Indifference Curve Neither Touches the Horizontal Axis Nor the Vertical Axis
Another characteristic of the indifference curve is that an indifference curve does not touch the x-axis.
If it does so it means he consumes a very large amount of commodity X and zero amount of commodity Y.
If the indifference curve touches the vertical line(OY-axis) then he will consume a very large quantity of commodity Y while zero quantity of commodity X.
This situation has been shown in the diagram given below:
6. Perfect Complementary Goods have L-Shaped Indifference Curves
In the case of those complementary goods which are jointly demanded like bread and butter, shoes and socks.
It is it the Indifference curves will be L- shaped As given in the diagram:
7. Indifference Curves are Not Necessarily Parallel to Each Other
As we know that all indifference curve slopes downward to right or have negative slopes.
But the rate o the slope may not necessarily be the same as shown in the following diagram:
8. Indifference Curve is Always Convex Towards the Point of Origin
A curve that slopes downwards can have three possible steps:
- Convex towards the origin.
- Concave curve and.
- Straight-line curve.
The shape of the curve is determined by the rate of substitution between the two commodities.
The curve will be a convex one if the marginal rate of substitution diminishes; the concavity will obtain if the marginal rate of substitution Rises; and the constant marginal rate of substitution will give us a straight line curve.
Indifference curve analysis is based on the assumption of the diminishing marginal rate of substitution.
Hence, the Indifference curves are always convex towards the point of origin.
Examples of Indifference Curve with Diagram
Following are the different examples of indifference curves with diagrams:
Example No. 1
Our imaginary consumer has $30 to spend on grapes and apples.
Grapes are priced at $6 per kg whereas apples are priced at $5 per kg.
The various combinations that provide equal satisfaction to the consumer are grouped into two sets.
Example No. 2
What will happen if the consumer’s income increases to (1) $45 (2) $60 (3) $ 75?
As a result of an increase in the consumer’s income, The budget lines will shift right words.
Correspondingly, the equilibrium point will also shift the right words as shown in the following figure.
The line running through the equilibrium point is known as the income-consumption curve, which illustrates the income effects on consumers’ equilibrium.
Example No. 3
What will happen if the consumer’s income remains unchanged at $30, but the price of grapes falls to (1) $5 per kg and (2) $4 per kg?
Since the price of Apple has not changed, the consumer can purchase at the extreme 6 kg. of Apples.
But since grapes have become cheaper, he can purchase at the extreme 6 kg (when the price is $5 per kg) or 7.5 kg. (when the price is $4 per kg).
As a result, the new budget lines will shift towards the right on the x-axis.
Since grapes have gone cheaper, the consumer would like to purchase more grapes in place of apples.
Thus, The figure shows that with every fall in the price of grapes, The budget line shifts to the right. The consumer’s equilibrium also shifts to the right.
The curve that joins the various equilibrium points is known as the price consumption curve.
The curve of the price effect consumer equilibrium.
A set of indifference curves is called “an Indifference map”.
Such a map has been drawn in fig. Each curve on the right-hand side represents a high level of satisfaction as compared to a curve on the left.
A higher curve measures greater quantities of both the commodities and Hence the highest level of satisfaction.
A lower curve, On the other hand, will measure lesser quantities and hence the lesser level of satisfaction.
There are many objectives of demanding to forecast for good consumer equilibrium.
Characteristics of the Indifference Curve
The concept of the scale of differences forms the basis of the indifference curve analysis.
The various combinations are so, arranged in order to show different levels of satisfaction, each level of satisfaction being marked in ordinal numbers as first, second, third, and, so forth.
The different combinations of two goods on the scale of preferences would get the consumer equal satisfaction. i.e., where a consumer would prefer to choose a combination on one scale of preference to some other combination on another scale of preference, he will show indifference towards the different combinations on the same scale of reference.
A consumer would be indifferent towards the different combinations on the same scale of preference because these different combinations would get him equal satisfaction, and there will be no point for him to preferring one combination to another on the same scale of preference.
Consumer’s Equilibrium with Example
Explanation of consumer’s Equilibrium with the help of indifference curve analysis.
As already stated earlier, the technique of the indifference curve has been developed as an alternative to Marshallian utility analysis to provide a logical explanation of the consumer’s equilibrium position. I.e.,
A position in which the consumer reaches the highest level of satisfaction, Given his money income and the prices of the two commodities.
If we assume that we know the prices of two commodities we can list down a number of comparison combinations of two commodities that the consumer can actually buy in the market. This set of combinations can be shown geometrically with the help of a straight line drawn in fig this line is called the budget line.
A budget line represents all those combinations of the two commodities that the consumer can purchase, given his money income and the prices of the two commodities.
An Indifference map shows the different scales of preference of the consumer. The consumer has to reach the highest possible scale of reference.
Thus, the consumer can reach the highest scale of preference marked as IC2 and establish equilibrium at point P where the consumes OM of commodity X and ON of commodity Y. Points S and R also lie on the budget line.
But then these points lie on a lower indifference curve marked IC1: Hence, the consumer will prefer a combination of P to S and R.
The consumer would definitely prefer to have a combination on Point T, provident he can purchase it.
Point T lies beyond his income range and hence is not feasible.
Therefore, the consumer’s equilibrium is established at point P.
The following conclusions must be fulfilled for a consumer to be in equilibrium.
- The budget line should be tangent to the indifference curve in more technical terms, the slope of the budget line should equal the slope of the indifference curve.
- At the point of consumer equilibrium indifference curve should be convex; it should not be concave. Convexity of the curve implies the dimension marginal rate of substitution(MRS).
Determine the Consumer’s Equilibrium
With the help of the available information, we can draw (a) a budget line and (b) an Indifference map.
The point where the budget line is tangent to one of the Indifference curves will determine the consumer’s equilibrium. Equilibrium is established at point E on IC2 in fig.
The consumer will purchase 3 kg. of apples and 2.5 kg. of grapes.