Indifference Curve Analysis Concept Assumptions and Properties

Indifference Curve Analysis: Concept, Assumptions and
Properties
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EasyNotes4U October 30,

2018
Indifference Curve Analysis: Concept. Assumptions and

Properties
In microeconomics, an indifference curve is an important tool of analysis in the study of
consumer behavior.
The concept of indifference curve analysis was first propounded by British economist
Francis Ysidro Edgeworth and was put into use by Italian economist Vilfredo Pareto during
the early 20th century. However, it was brought into extensive use by economists J.R. Hicks
and R.G.D Allen.
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Hicks and Allen criticized the Marshallian cardinal approach of utility and developed
indifference curve theory of consumer’s demand. Thus, this theory is also known as the
ordinal approach.
Indifference curve
An indifference curve is a locus of all combinations of two goods which yield the same
level of satisfaction (utility) to the consumers.
Since any combination of the two goods on an indifference curve gives the equal level
of satisfaction, the consumer is indifferent to any combination he consumes. Thus, an
indifference curve is also known as ‘equal satisfaction curve’ or ‘iso-utility curve’.
On a graph, an indifference curve is a link between the combinations of quantities

which the consumer regards to yield equal utility. Simply, an indifference curve is a
graphical representation of indifference schedule.
The table given below is an example of indifference schedule and the graph that follows is
the illustration of that schedule.
Table: Indifference schedule
Combination Mangoes Oranges
A 1 14
B 2 9
C 3 6
D 4 4
E 5 2.5
Figure: Graphical representation of indifference curve
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Assumptions of the indifference curve
The indifference curve theory is based on a few assumptions. These assumptions are
Two commodities
It is assumed that the consumer has a fixed amount of money, all of which is to be spent
only on two goods. It is also assumed that prices of both the commodities are constant.
Non-satiety
Satiety means saturation. And, indifference curve theory assumes that the consumer has
not reached the point of satiety. It implies that the consumer still has the willingness to
consume more of both the goods. The consumer always tends to move to a higher
indifference curve seeking higher satisfaction.
Ordinal utility
According to this theory, the utility is a psychological phenomenon and thus it is
unquantifiable. However, the theory assumes that a consumer can express utility in terms
of rank. The consumer can rank his/her preferences on the basis of satisfaction yielded from
each combination of goods.
The diminishing marginal rate of substitution

The marginal rate of substitution may be defined as the amount of a commodity that a
consumer is willing to trade off for another commodity, as long as the second commodity
provides same level of utility as the first one.
And, diminishing the marginal rate of substitution states that the rate by which a person
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substitutes X for Y diminishes more and more with each successive substitution of X for Y.
As indifference curve theory is based on the concept of diminishing marginal rate of

substitution, an indifference curve is convex to the origin.
Rational consumers
According to this theory, a consumer always behaves in a rational manner, i.e. a consumer
always aims to maximize his total satisfaction or total utility.
Properties of the indifference curve

There are four basic properties of an indifference curve. These properties are
Indifference curve slope downwards to the right

An indifference curve can neither be horizontal line nor an upward sloping curve. This is an
important feature of an indifference curve.
When a consumer wants to have more of a commodity, he/she will have to give up some of
the other commodity, given that the consumer remains on the same level of utility at
constant income. As a result, the indifference curve slopes downward from left to right.
In the above diagram, IC is an indifference

curve, and A and B are two points which
represent the combination of goods yielding
the same level of satisfaction.
We can see that when X1 amount of

commodity X was consumed, Y1 amount of
commodity Y was also consumed. When the
consumer increased the consumption of
commodity X to X2, the amount of
commodity Y fell to Y2. And, thus the curve is
sloping downward from left to right.
The indifference curve is convex to the origin

As mentioned previously, the concept of the indifference curve is based on the properties of
diminishing marginal rate of substitution.
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According to diminishing marginal rate of substitution, the rate of substitution of
commodity X for Y decreases more and more with each successive substitution of X for Y.
Also, two goods can never perfectly substitute each other. Therefore, the rate of decrease in
a commodity cannot be equal to the rate of increase in another commodity.
Table: Indifference schedule
Combination Cigarette Coffee
A 1 12
B 2 8
C 3 5
D 4 3
E 5 2
The above table represents various combination of coffee and cigarette that gives a man
same level of utility. When the man drinks 12 cup of coffee, he consumes 1 cigarette every
day. When he started consuming two cigarettes a day, his coffee consumption dropped to 8
cups a day. In the same way, we can see other combinations as 3 cigarettes + 5 cup coffee, 4
cigarettes + 3 cup coffee and 5 cigarettes + 2 cup coffee.
We can clearly see that the rate of decrease

in the consumption of coffee is not the same
as the rate of increase in consumption of
cigarette. Similarly, the rate of decrease in
the consumption of coffee has gradually
decreased even with the constant increase in
consumption of cigarette.
Thus, the indifference curve is always convex

(neither concave nor straight).
Indifference curve cannot intersect each other

Each indifference curve is a representation of a particular level of satisfaction.
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The level of satisfaction of consumer for any given combination of two commodities is the
same for a consumer throughout the curve. Thus, indifference curves cannot intersect each
other.
The following diagram will help you understand this property clearer.
In the above image, IC1 and IC2 are two

indifference curves and C is the point where
both the curves intersect.
According to indifference curve theory,

satisfaction at point C = satisfaction at point A
Also, satisfaction at point C = satisfaction at
point B
But, satisfaction at point B ≠ satisfaction at
point A.
Therefore, two indifference curves cannot

intersect. Yet, two indifference curves need
not be parallel to each other.
Higher indifference curve represents a higher level of satisfaction

Higher the indifference curves, higher will be the level of satisfaction. This means any
combination of two goods on the higher curve give a higher level of satisfaction to the
consumer than the combination of goods on the lower curve.
In the above figure, IC1 and IC2 are two

indifference curves, and IC2 is higher than
IC1. We can also see that Q is a point on IC2
and S is a point on IC2.
Combination at point Q contains more of

both the goods (X and Y) than that of the
combination at point S. We know that total
utility of commodity tends to increase with
increase in stock of the commodity. Thus,
utility at point Q is greater than utility at
point S, i.e. satisfaction yielded from higher
curve is greater than satisfaction yielded from
lower curve.
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Indifference Curve Analysis: Concept, Assumptions and

EasyNotes4U October 30,

Indifference Curve Analysis: Concept. Assumptions and

On a graph, an indifference curve is a link between the combinations of quantities

Table: Indifference schedule

Combination Mangoes Oranges

Figure: Graphical representation of indifference curve

The diminishing marginal rate of substitution

As indifference curve theory is based on the concept of diminishing marginal rate of

Properties of the indifference curve

Indifference curve slope downwards to the right

In the above diagram, IC is an indifference

We can see that when X1 amount of

The indifference curve is convex to the origin

Table: Indifference schedule

Combination Cigarette Coffee

We can clearly see that the rate of decrease

Thus, the indifference curve is always convex

Indifference curve cannot intersect each other

In the above image, IC1 and IC2 are two

According to indifference curve theory,

Therefore, two indifference curves cannot

Higher indifference curve represents a higher level of satisfaction

In the above figure, IC1 and IC2 are two

Combination at point Q contains more of

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