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Indifference curve - Wikipedia, the free encyclopedia

Indifference curve
From Wikipedia, the free encyclopedia

In microeconomic theory, an indifference curve is a graph showing

different bundles of goods between which a consumer is indifferent.
That is, at each point on the curve, the consumer has no preference
for one bundle over another. One can equivalently refer to each point
on the indifference curve as rendering the same level of utility
(satisfaction) for the consumer. Utility is then a device to represent
preferences rather than something from which preferences come.[1]
The main use of indifference curves is in the representation of
potentially observable demand patterns for individual consumers over
commodity bundles.[2]
There are infinitely many indifference curves: one passes through each
combination. A collection of (selected) indifference curves, illustrated
graphically, is referred to as an indifference map.

An example of an indifference map with

three indifference curves represented

Contents
1 History
2 Map and properties of indifference curves
3 Assumptions of consumer preference theory
3.1 Application
3.2 Examples of indifference curves
4 Preference relations and utility
4.1 Preference relations
4.2 Formal link to utility theory
4.3 Examples
4.3.1 Linear utility
4.3.2 Cobb-Douglas utility
4.3.3 CES utility
4.3.4 Biology
5 See also
6 Footnotes
7 Notes
8 References
9 External links

History

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The theory of indifference curves was developed by Francis Ysidro Edgeworth, who explained in his book
"Mathematical Psychics: an Essay on the Application of Mathematics to the Moral Sciences, 1881,[3] the
mathematics needed for its drawing; later on, Vilfredo Pareto was the first author to actually draw these curves, in
his book "Manual of Political Economy," 1906;[4][5] and others in the first part of the 20th century. The theory can
be derived from William Stanley Jevons's ordinal utility theory, which posits that individuals can always rank any
consumption bundles by order of preference.[6]

Map and properties of indifference curves

A graph of indifference curves for an individual consumer associated with different utility levels is called an
indifference map. Points yielding different utility levels are each associated with distinct indifference curves and is
like a contour line on a topographical map. Each point on the curve represents the same elevation. If you move "off"
an indifference curve traveling in a northeast direction (assuming positive marginal utility for the goods) you are
essentially climbing a mound of utility. The higher you go the greater the level of utility. The non-satiation
requirement means that you will never reach the "top," or a "bliss point," a consumption bundle that is preferred to
all others
Indifference curves are typically represented to be:
1. Defined only in the non-negative quadrant of commodity quantities (i.e. the possibility of having negative
quantities of any good is ignored).
2. Negatively sloped. That is, as quantity consumed of one good (X) increases, total satisfaction would increase
if not offset by a decrease in the quantity consumed of the other good (Y). Equivalently, satiation, such that
more of either good (or both) is equally preferred to no increase, is excluded. (If utility U = f(x, y), U, in the
third dimension, does not have a local maximum for any x and y values.) The negative slope of the
indifference curve reflects the assumption of the monotonicity of consumer's preferences, which generates
monotonically increasing utility functions, and the assumption of non-satiation (marginal utility for all goods is
always positive); an upward sloping indifference curve would imply that a consumer is indifferent between a
bundle A and another bundle B because they lay on the same indifference curve, even in the case in which
the quantity of both goods in bundle B is higher. Because of monotonicity of preferences and non-satiation, a
bundle with more of both goods must be preferred to one with less of both, thus the first bundle must yield a
higher utility, and lay on a different indifference curve at a higher utility level.
The negative slope of the indifference curve implies that the marginal rate of substitution is always positive;
1. Complete, such that all points on an indifference curve are ranked equally preferred and ranked either more
or less preferred than every other point not on the curve. So, with (2), no two curves can intersect
(otherwise non-satiation would be violated).
2. Transitive with respect to points on distinct indifference curves. That is, if each point on I2 is (strictly)
preferred to each point on I1 , and each point on I3 is preferred to each point on I2 , each point on I3 is
preferred to each point on I1 . A negative slope and transitivity exclude indifference curves crossing, since
straight lines from the origin on both sides of where they crossed would give opposite and intransitive
preference rankings.
3. (Strictly) convex. With (2), convex preferences imply that the indifference curves cannot be concave to the
origin, i.e. they will either be straight lines or bulge toward the origin of the indifference curve. If the latter is
the case, then as a consumer decreases consumption of one good in successive units, successively larger
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doses of the other good are required to keep satisfaction

unchanged.

Assumptions of consumer preference

theory
Preferences are complete. The consumer has ranked all
available alternative combinations of commodities in terms of
the satisfaction they provide him.
Assume that there are two consumption bundles A and
B each containing two commodities x and y. A
consumer can unambiguously determine that one and
only one of the following is the case:
A is preferred to B A p B[7]
B is preferred to A B p A[7]
A is indifferent to B A I B[7]
Note that this axiom precludes the
possibility that the consumer cannot
decide,[8] and that a consumer is able to
make this comparison with respect to
every conceivable bundle of goods.[7]
Preferences are reflexive
Means that if A and B are in all respect identical the
consumer will recognize this fact and be indifferent in
comparing A and B
A = B A I B[7]
Preferences are transitive [nb 1]
If A p B and B p C then A p C.[7]
Also A I B and B I C then A I C.[7]
This is a consistency assumption.
Preferences are continuous
If A is preferred to B and C is infinitesimally close to B
An example of how indifference curves
then A is preferred to C.
are obtained as the level curves of a
p
p
A B & C B A C.
utility function
"Continuous" means infinitely divisible - just like
there are infinite numbers between 1 and 2 all
bundles are infinitely divisible. This assumption makes indifference curves continuous.
Preferences exhibit strong monotonicity
if A has more of both x and y than B then A is preferred to B
this assumption is commonly called the "more is better" assumption
an alternative version of this assumption is strong monotonicity which requires that if A and B
have the same quantity of one good, but A has more of the other, then A is preferred to B.

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It also implies that the commodities are good rather than bad. Examples of bad commodities can be disease,
pollution etc. because we always desire less of such things.
Indifference curves exhibit diminishing marginal rates of substitution
The marginal rate of substitution tells how much 'y' a person is willing to sacrifice to get one more unit
of 'x'.
This assumption assures that indifference curves are smooth and convex to the origin.
This assumption also set the stage for using techniques of constrained optimization because the shape
of the curve assures that the first derivative is negative and the second is positive.
Another name for this assumption is the substitution assumption. It is the most critical assumption of
consumer theory: Consumers are willing to give up or trade-off some of one good to get more of
another. The fundamental assertion is that there is a maximum amount that "a consumer will give up, of
one commodity, to get one unit of another good, in that amount which will leave the consumer
indifferent between the new and old situations"[9] The negative slope of the indifference curves
represents the willingness of the consumer to make a trade off.[9]
There are also many sub-assumptions:
Irreflexivity - for no x is xp x
Negative transitivity - if xnot-p y then for any third commodity z, either xnot-p z or znot-p y or both.

Application
Consumer theory uses indifference curves and budget constraints to
generate consumer demand curves. For a single consumer, this is a
relatively simple process. First, let one good be an example market e.g.,
carrots, and let the other be a composite of all other goods. Budget
constraints give a straight line on the indifference map showing all the
possible distributions between the two goods; the point of maximum
utility is then the point at which an indifference curve is tangent to the
budget line (illustrated). This follows from common sense: if the market
values a good more than the household, the household will sell it; if the
market values a good less than the household, the household will buy it.
The process then continues until the market's and household's marginal
rates of substitution are equal.[10] Now, if the price of carrots were to
change, and the price of all other goods were to remain constant, the
gradient of the budget line would also change, leading to a different point
of tangency and a different quantity demanded. These price / quantity
combinations can then be used to deduce a full demand curve.[10] A line
connecting all points of tangency between the indifference curve and the
budget constraint is called the expansion path.[11]

To maximise utility, a household

should consume at (Qx, Qy).
Assuming it does, a full demand
schedule can be deduced as the price
of one good fluctuates.

Examples of indifference curves

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Figure 1: An example of
an indifference map with
three indifference curves
represented

Figure 2: Three
indifference curves
where Goods X and Y
are perfect substitutes.
The gray line
perpendicular to all
curves indicates the
curves are mutually
parallel.

Figure 3: Indifference
curves for perfect
complements X and Y.
The elbows of the
curves are collinear.

In Figure 1, the consumer would rather be on I3 than I2 , and would rather be on I2 than I1 , but does not care
where he/she is on a given indifference curve. The slope of an indifference curve (in absolute value), known by
economists as the marginal rate of substitution, shows the rate at which consumers are willing to give up one good in
exchange for more of the other good. For most goods the marginal rate of substitution is not constant so their
indifference curves are curved. The curves are convex to the origin, describing the negative substitution effect. As
price rises for a fixed money income, the consumer seeks less the expensive substitute at a lower indifference curve.
The substitution effect is reinforced through the income effect of lower real income (Beattie-LaFrance). An example
of a utility function that generates indifference curves of this kind is the Cobb-Douglas function
. The negative slope of the indifference curve incorporates the willingness of the consumer
[12]
to make trade offs.
If two goods are perfect substitutes then the indifference curves will have a constant slope since the consumer
would be willing to switch between at a fixed ratio. The marginal rate of substitution between perfect substitutes is
likewise constant. An example of a utility function that is associated with indifference curves like these would be
.
If two goods are perfect complements then the indifference curves will be L-shaped. Examples of perfect
complements include left shoes compared to right shoes: the consumer is no better off having several right shoes if
she has only one left shoe - additional right shoes have zero marginal utility without more left shoes, so bundles of
goods differing only in the number of right shoes they includes - however many - are equally preferred. The
marginal rate of substitution is either zero or infinite. An example of the type of utility function that has an
indifference map like that above is the Leontief function:
.
The different shapes of the curves imply different responses to a change in price as shown from demand analysis in
consumer theory. The results will only be stated here. A price-budget-line change that kept a consumer in
equilibrium on the same indifference curve:
in Fig. 1 would reduce quantity demanded of a good smoothly as price rose relatively for that good.
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in Fig. 2 would have either no effect on quantity demanded of either good (at one end of the budget
constraint) or would change quantity demanded from one end of the budget constraint to the other.
in Fig. 3 would have no effect on equilibrium quantities demanded, since the budget line would rotate around
the corner of the indifference curve.[nb 2]

Preference relations and utility

Choice theory formally represents consumers by a preference relation, and use this representation to derive
indifference curves showing combinations of equal preference to the consumer.

Preference relations
Let
be a set of mutually exclusive alternatives among which a consumer can choose.
and be generic elements of .
In the language of the example above, the set is made of combinations of apples and bananas. The symbol
one such combination, such as 1 apple and 4 bananas and is another combination such as 2 apples and 2
bananas.
A preference relation, denoted

, is a binary relation define on the set

is

The statement

is described as ' is weakly preferred to .' That is,

is at least as good as

(in preference satisfaction).

The statement

is described as ' is weakly preferred to , and is weakly preferred to .' That is, one is indifferent to the
choice of or , meaning not that they are unwanted but that they are equally good in satisfying preferences.
The statement

is described as ' is weakly preferred to , but

preferred to .'
The preference relation
whenever
and

is complete if all pairs

then
.

is not weakly preferred to .' One says that ' is strictly

can be ranked. The relation is a transitive relation if

For any element

, the corresponding indifference curve,
indifferent to . Formally,
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is made up of all elements of

which are

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Formal link to utility theory

In the example above, an element
number of bananas, call it

of the set

is made of two numbers: The number of apples, call it

and the

In utility theory, the utility function of an agent is a function that ranks all pairs of consumption bundles by order of
preference (completeness) such that any set of three or more bundles forms a transitive relation. This means that
for each bundle
there is a unique relation,
, representing the utility (satisfaction) relation associated
with
. The relation
is called the utility function. The range of the function is a set of
real numbers. The actual values of the function have no importance. Only the ranking of those values has content for
the theory. More precisely, if
, then the bundle
is described as at least as good as
the bundle
. If
, the bundle
is described as strictly preferred to the
bundle
.
Consider a particular bundle

and take the total derivative of

about this point:

or, without loss of generality,

(Eq. 1)
where
(Likewise for

is the partial derivative of

)

with respect to its first argument, evaluated at

The indifference curve through

must deliver at each bundle on the curve the same utility level as bundle
. That is, when preferences are represented by a utility function, the indifference curves are the level
curves of the utility function. Therefore, if one is to change the quantity of by
, without moving off the
indifference curve, one must also change the quantity of by an amount
such that, in the end, there is no change
in U:
, or, substituting 0 into (Eq. 1) above to solve for dy/dx:
.
Thus, the ratio of marginal utilities gives the absolute value of the slope of the indifference curve at point
This ratio is called the marginal rate of substitution between and .

Examples
Linear utility

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If the utility function is of the form

the marginal utility of is

then the marginal utility of is

. The slope of the indifference curve is, therefore,

Observe that the slope does not depend on

and

or : the indifference curves are straight lines.

Cobb-Douglas utility
If the utility function is of the form

the marginal utility of

and the marginal utility of is

.Where
curve, and therefore the negative of the marginal rate of substitution, is then

is
. The slope of the indifference

CES utility
A general CES (Constant Elasticity of Substitution) form is

where
and
marginal utilities are given by

. (The Cobb-Douglas is a special case of the CES utility, with

.) The

and

Therefore, along an indifference curve,

These examples might be useful for modelling individual or aggregate demand.

Biology
As used in Biology, the indifference curve is a model for how animals 'decide' whether to perform a particular
behavior, based on changes in two variables which can increase in intensity, one along the x-axis and the other
along the y-axis. For example, the x-axis may measure the quantity of food available while the y-axis measures the
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risk involved in obtaining it. The indifference curve is drawn to predict the animal's behavior at various levels of risk
and food availability.

See also
Budget constraint
Community indifference curve
Consumer theory
Convex preferences
Endowment effect
Indifference price
Level curve
Microeconomics
Rationality
Utilitypossibility frontier

Footnotes
1. ^ The transitivity of weak preferences is sufficient for most IC analysis: If A is weakly preferred to B meaning that
the consumer likes A at least as much as B and B is weakly preferred to C then A is weakly preferred to C. [8]
2. ^ Indifference curves can be used to derive the individual demand curve. However, the assumptions of consumer
preference theory do not guarantee that the demand curve will have a negative slope. [13]

Notes
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.

^ Geanakoplis (1987), p. 117.

^ Bhm and Haller (1987), p. 785.
^ http://onlinebooks.library.upenn.edu/webbin/book/lookupid?key=olbp34052
^ http://archive.org/details/manualedieconomi00pareuoft
^ http://www.policonomics.com/indifference-curves/
^ http://www.policonomics.com/william-stanley-jevons/
^ a b c d e f g Binger and Hoffman (1998). pp. 109-17.
^ a b Perloff (2008). p. 62.
^ a b Silberberg and Suen (2000).
^ a b Lipsey (1975). pp. 182-186.
^ Salvatore, Dominick (1989). Schaum's outline of theory and problems of managerial economics, McGraw-Hill,
ISBN 978-0-07-054513-7
12. ^ Id.
13. ^ Binger and Hoffman (1998). p. 141-43.

References
Beattie, Bruce R.; LaFrance, Jeffrey T. (2006). "The Law of Demand versus Diminishing Marginal Utility".
Appl. Econ. Perspect. Pol. 28 (2): 263271. doi:10.1111/j.1467-9353.2006.00286.x
(http://dx.doi.org/10.1111%2Fj.1467-9353.2006.00286.x).
Binger; Hoffman (1998). Microeconomics with Calculus (2nd ed.). Reading: Addison-Wesley.
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ISBN 0321012259.
Bhm, Volker; Haller, Hans (1987). "Demand theory". The New Palgrave: A Dictionary of Economics 1.
pp. 785792.
Geanakoplos, John (1987). "Arrow-Debreu model of general equilibrium". The New Palgrave: A
Dictionary of Economics 1. pp. 116124.
Perloff, Jeffrey M. (2008). Microeconomics: Theory & Applications with Calculus. Boston: AddisonWesley. ISBN 9780321277947.
Silberberg; Suen (2000). The Structure of Economics: A Mathematical Analysis (3rd ed.). Boston:
McGraw-Hill. ISBN 0071181369.
Lipsey, Richard G. (1975). An introduction to positive economics (fourth ed.). Weidenfeld & Nicolson.
pp. 2147. ISBN 0-297-76899-9.

External links
Anatomy of Cobb-Douglas Type Utility Functions in 3D
(http://www2.hawaii.edu/~fuleky/anatomy/anatomy.html)
Anatomy of CES Type Utility Functions in 3D (http://www2.hawaii.edu/~fuleky/anatomy/anatomy2.html)
Retrieved from "http://en.wikipedia.org/w/index.php?title=Indifference_curve&oldid=567088348"
Categories: Consumer theory Household behavior and family economics Microeconomics Economics curves
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