Economics Explained: Indifference Curve

In this discussion, we will define indifference curves and examine their characteristics. Indifference curves were first introduced by the English economist F. Y. Edgeworth in the 1880. The concept was refined and used extensively by the Italian economist Vilfredo Pareto in the early 1900. Indifference curves are a crucial tool of analysis because they are used to represent an order of the tastes and preferences of the consumer and to show how the consumer maximizes utility in spending income.

An indifference curve shows the various combinations of two goods that give the consumer equal utility or satisfaction. A higher indifference curve refers to a higher level of satisfaction, and a lower indifference curve refers to less satisfaction. However, we cannot exactly measure how much extra satisfaction or utility a higher indifference curve indicates. Different indifference curves simply provide an ordering or ranking of the individual’s preference.

In order to conduct the analysis, we will assume that there are only two goods, X and Y. Below table gives an indifference schedule showing the various combinations of hamburgers (good X) and soft drinks (good Y) that give the consumer equal satisfaction

Above information is plotted as indifference curve U1 in below graph. The indifference curve U2 is a higher indifference curve and a lower indifference curve is U0 . U1 shows that one hamburger and ten soft drinks per unit of time (Combination A) give the consumer the same level of satisfaction as two hamburgers and six soft drinks (combination B) , four hamburgers and three soft drinks (combination C), or seven hamburgers and one soft drink (combination F). On the other hand, combination R (four hamburgers and seven soft drinks) has both more hamburgers and more soft drinks than combination B and so it gives a higher level of satisfaction. Thus, combination R and all the other combinations that give the same level of satisfaction as combination R represents higher indifference curve. On Uo all the points give the same satisfaction as combination T , and combination T refers to both fewer hamburgers and fewer soft drinks than (and therefore is inferior to) combination B on U1 and U2.

Characteristics of Indifference Curves

i. Downward Sloping: The indifference curves must slope down from left to right. This means that an indifference curve is negatively sloped. It slopes downward because as the consumer increases the consumption of X commodity, he has to give up certain units of Y commodity in order to maintain the same level of satisfaction. In the above curves we see that as we increase quantity of hamburger, we have to sacrifice soft drinks.

ii.Convex to Origin: This is an important property of indifference curves. They are convex to the origin (bowed inward). In the above figure, as the consumer moves from A to B to C to F it is shown that the marginal rate of decreasing hamburger diminishes along the indifference curve.

iii. Higher Indifference Curve Represents Higher Level of satisfaction : A higher indifference curve that lies above and to the right of another indifference curve represents a higher level of satisfaction and combination on a lower indifference curve gives a lower satisfaction.In other words, we can say that the combination of goods which lies on a higher indifference curve will be preferred by a consumer to the combination which lies on a lower indifference curve.

IV.Indifference Curve Cannot Intersect Each Other: Given the definition of indifference curve and the assumptions behind it, the indifference curves cannot intersect each other. Intersection will mean that the higher curve will give as much utility from the two goods as is given by the lower indifference curve. This is impossible.

Hamburgers (Good X)	Soft Drinks (Good Y)
1	10	A
2	6	B
4	3	C
7	1	F