Meaning of Indifference Curve:

When a consumer consumes various goods and services, then there are some combinations, which give him
exactly the same total satisfaction. The graphical representation of such combinations is termed as indifference
curve.
Indifference curve refers to the graphical representation of various alternative combinations of bundles of two
goods among which the consumer is indifferent. Alternately, indifference curve is a locus of points that show such
combinations of two commodities which give the consumer same satisfaction. Let us understand this with the help of
following indifference schedule, which shows all the combinations giving equal satisfaction to the consumer.

Table 2.5: Indifference Schedule

Combination of Apples Bananas
Apples and Bananas (A) (B)
P 1 15
Q 2 10
R 3 6
S 4 3
T 5 1

As seen in the schedule, consumer is indifferent between five

combinations of apple and banana. Combination ‘P’ (1A + 15B) gives
the same utility as (2A + 10B), (3A + 6B) and so on. When these
combinations are represented graphically and joined together, we get an
indifference curve ‘IC1’ as shown in Fig. 2.4.
In the diagram, apples are measured along the X-axis and bananas on
the Y-axis. All points (P, Q, R, S and T) on the curve show different
combinations of apples and bananas. These points are joined with the
help of a smooth curve, known as indifference curve (IC 1). An indifference curve is the locus of all the points,
representing different combinations, that are equally satisfactory to the consumer.
Every point on IC1, represents an equal amount of satisfaction to the consumer. So, the consumer is said to be
indifferent between the combinations located on Indifference Curve ‘IC 1’. The combinations P, Q, R, S and T give
equal satisfaction to the consumer and therefore he is indifferent among them. These combinations are together
known as ‘Indifference Set’.
Indifference Map:
Indifference Map refers to the family of indifference curves that represent consumer preferences over all the
bundles of the two goods. An indifference curve represents all the combinations, which provide same level of
satisfaction. However, every higher or lower level of satisfaction can
be shown on different indifference curves. It means, infinite
number of indifference curves can be drawn.
In Fig. 2.5, IC1 represents the lowest satisfaction, IC2 shows
satisfaction more than that of IC 1 and the highest level of
satisfaction is depicted by indifference curve IC3. However, each
indifference curve shows the same level of satisfaction
individually.
It must be noted that ‘Higher Indifference curves represent
higher levels of satisfaction’ as higher indifference curve
represents larger bundle of goods, which means more utility
because of monotonic preference.
Marginal Rate of Substitution (MRS):
MRS refers to the rate at which the commodities can be
substituted with each other, so that total satisfaction of the
consumer remains the same. For example, in the example of
apples (A) and bananas (B), MRS of ‘A’ for ‘B’, will be number of units
of ‘B’, that the consumer is willing to sacrifice for an additional unit
of ‘A’, so as to maintain the same level of satisfaction.
MRSAB = Units of Bananas (B) willing to Sacrifice / Units of Apples (A) willing to Gain
MRSAB = ∆B/∆A
MRSAB is the rate at which a consumer is willing to give up Bananas for one more unit of Apple. It means, MRS
measures the slope of indifference curve.
It must be noted that in mathematical terms, MRS should always be negative as numerator (units to be sacrificed)
will always have negative value. However, for analysis, absolute value of MRS is always considered.
The concept of MRSAB is explained through Table 2.6 and Fig. 2.6

Table 2.6: MRS between Apple and Banana:

 Bana
Apples na
Combination (A) (B) MRSAB
P 1 15 -
Q 2 10 5B:1 A
R 3 6 4B:1A
S 4 3 3B:1A
T 5 1 2B:1 A

As seen in the given schedule and diagram, when consumer moves

from P to Q, he sacrifices 5 bananas for 1 apple. Thus, MRS AB comes
out to be 5:1. Similarly, from Q to R, MRS AB is 4:1. In combination T,
the sacrifice falls to 2 bananas for 1 apple. In other words, the MRS of
apples for bananas is diminishing.
Why MRS diminishes?
MRS falls because of the law of diminishing marginal utility. In the
given example of apples and bananas, Combination ‘P’ has only 1
apple and, therefore, apple is relatively more important than bananas.
Due to this, the consumer is willing to give up more bananas for an
additional apple. But as he consumes more and more of apples, his
marginal utility from apples keeps on declining. As a result, he is
willing to give up less and less of bananas for each apple.
Properties of Indifference Curve:
1. Indifference curves are always convex to the origin:
An indifference curve is convex to the origin because of
diminishing MRS. MRS declines continuously because of the law of diminishing marginal utility. As seen in Table
2.6, when the consumer consumes more and more of apples, his marginal utility from apples keeps on declining and
he is willing to give up less and less of bananas for each apple. Therefore, indifference curves are convex to the origin
(see Fig. 2.6). It must be noted that MRS indicates the slope of indifference curve.
2. Indifference curve slope downwards:
It implies that as a consumer consumes more of one good, he must consume less of the other good. It happens
because if the consumer decides to have more units of one good (say apples), he will have to reduce the number of
units of another good (say bananas), so that total utility remains the same.
3. Higher Indifference curves represent higher levels of satisfaction:
Higher indifference curve represents large bundle of goods, which means more utility because of monotonic
preference. Consider point ‘A’ on ICXand point ‘B’ on IC 2 in Fig. 2.5. At ‘A’, consumer gets the combination (OR, OP)
of the two commodities X and Y. At ‘B’, consumer gets the combination (OS, OP). As OS > OR, the consumer gets
more satisfaction at IC2.
4. Indifference curves can never intersect each other:
As two indifference curves cannot represent the same level of
satisfaction, they cannot intersect each other. It means, only one
indifference curve will pass through a given point on an
indifference map. In Fig. 2.7, satisfaction from point A and from B on
IC1 will be the same.
Similarly, points A and C on IC2 also give the same level of
satisfaction. It means, points B and C should also give the same level of
satisfaction. However, this is not possible, as B and C lie on two
different indifference curves, IC1 and IC2 respectively and
represent different levels of satisfaction. Therefore, two indif- ference
curves cannot intersect each other.

Consumer’s Equilibrium by Indifference Curve Analysis

Consumer equilibrium refers to a situation, in which a consumer derives maximum satisfaction, with no intention to change it and subject to
given prices and his given income. The point of maximum satisfaction is achieved by studying indifference map and budget line together.
On an indifference map, higher indifference curve represents a higher level of satisfaction than any lower indifference curve. So, a consumer
always tries to remain at the highest possible indifference curve, subject to his budget constraint.
Assumptions of Indifference Curve
1. Two commodities: It is assumed that the consumer has a fixed amount of money, whole of which is to be spent on the two goods, given
constant prices of both the goods.
2. Non Satiety: It is assumed that the consumer has not reached the point of saturation. Consumer always prefer more of both commodities,
i.e. he always tries to move to a higher indifference curve to get higher and higher satisfaction.
3. Ordinal Utility: Consumer can rank his preferences on the basis of the satisfaction from each bundle of goods.
4. Diminishing marginal rate of substitution: Indifference curve analysis assumes diminishing marginal rate of substitution. Due to this
assumption, an indifference curve is convex to the origin.
5. Rational Consumer: The consumer is assumed to behave in a rational manner, i.e. he aims to maximize his total satisfaction
Conditions of Consumer’s Equilibrium:
The consumer’s equilibrium under the indifference curve theory must meet the following two conditions:
(i) MRSXY = Ratio of prices or PX/PY
Let the two goods be X and Y. The first condition for consumer’s equilibrium is that MRS XY = PX/PY
a. If MRSXY > PX/PY, it means that the consumer is willing to pay more for X than the price prevailing in the market. As a result, the consumer
buys more of X. As a result, MRS falls till it becomes equal to the ratio of prices and the equilibrium is established.
b. If MRSXY < PX/PY, it means that the consumer is willing to pay less for X than the price prevailing in the market. It induces the consumer to
buys less of X and more of Y. As a result, MRS rises till it becomes equal to the ratio of prices and the equilibrium is established.
(ii) MRS continuously falls:
The second condition for consumer’s equilibrium is that MRS must be diminishing at the point of equilibrium, i.e. the indifference curve must be
convex to the origin at the point of equilibrium. Unless MRS continuously falls, the equilibrium cannot be established.
Thus, both the conditions need to be fulfilled for a consumer to be in equilibrium.
Let us now understand this with the help of a diagram:
In Fig. 2.12, IC1, IC2 and IC3 are the three indifference curves and AB is the
budget line. With the constraint of budget line, the highest indifference curve,
which a consumer can reach, is IC2. The budget line is tangent to indifference
curve IC2 at point ‘E’. This is the point of consumer equilibrium, where the
consumer purchases OM quantity of commodity ‘X’ and ON quantity of
commodity ‘Y.
All other points on the budget line to the left or right of point ‘E’ will lie on lower
indifference curves and thus indicate a lower level of satisfaction. As budget line
can be tangent to one and only one indifference curve, consumer maximizes his
satisfaction at point E, when both the conditions of consumer’s equilibrium are
satisfied:
(i) MRS = Ratio of prices or PX/PY:
At tangency point E, the absolute value of the slope of the indifference curve
(MRS between X and Y) and that of the budget line (price ratio) are same.
Equilibrium cannot be established at any other point as MRS XY > PX/PY at all
points to the left of point E and MRS XY < PX/PY at all points to the right of point E.
So, equilibrium is established at point E, when MRS XY = PX/PY.
(ii) MRS continuously falls:
The second condition is also satisfied at point E as MRS is diminishing at point E, i.e. IC 2 is convex to the origin at point E.
Criticisms
1. Unrealistic assumptions: It is based on unrealistic assumptions of rationality, perfect competition, divisibility of goods
and perfect knowledge of scale or preference.
2. No novelty: Prof. D.H. Robertson remarked that the indifference curve technique is merely “An old wine in new bottle.” This
technique is similar to the utility analysis because it merely gave new names to old terms. To utility analysis the consumer is in
equilibrium when: MUX / MUy = Px /Py According to IC, equilibrium is given by: MRSxy= Px/ Py = MUX / MUy
3. Indifference curve is non-transitive:
Prof. W.E. Armstrong has argued that as the difference of combinations increases, the difference in the satisfaction of different
combinations becomes evident and so the different combinations on the same indifference curve do not yield equal satisfaction.
4. Fails to explain risky choice: It cannot explain consumer behaviour when he has to choose among alternatives involving risk or
uncertainty of expectation.
5. Absurd and unrealistic combinations: When we consider different combinations of two goods, then there may be some
combinations that are meaningless and cannot be possible in real life.
6. Docs not provide behaviouristic explanation of consumer behaviour: The indifference map is hypothetical in nature and is not
based on observed market behaviour. It is subjective in nature instead of objective.
7. Based on weak ordering: Indifference curve analysis is based on the weak ordering hypothesis i.e., a consumer can be
indifferent between a large number of combinations.