Indifference Curve: Meaning, Assumptions and Properties

Meaning of Indifference Curve

A locus called an Indifference Curve (IC) represents various pairings of two items, such as X and Y, that provide the buyer with equal utility or satisfaction. IC forms a rectangular hyperbola with a descending slope to the right. The law of diminishing marginal rate of substitution, or MRS, is what is to blame. The indifference curve actually depicts equal contentment with various combinations of items. Each point on the difference curve denotes a unique combination. Therefore, the consumer's decision to select one combination over another is irrelevant. All of these combinations, which reflect the same level of satisfaction, are met with the same level of indifference from the buyer. The equal satisfaction curve and iso-utility curve are other names for the indifference curve.

Assumptions of Indifference Curve

The following presumptions form the foundation of the concept of an indifference curve:

• At once, two desires can be satisfied
• Consumers need to be logical
• It is possible to measure utility ordinarily.
• Additionally, it is expected that consumers make transitive decisions.
• A consumer lacks a sense of satisfaction.
• The law of diminishing marginal rate of substitution is in effect.
• A consumer's preferences run the gamut.

Isoquants Vs Indifference Curves

Similarities exist between the characteristics of isoquants and those of difference curves. But there are a few subtle differences. Isoquants represent different combinations of inputs, such as labor and capital, giving the same level of output, whereas the difference curve technique depicts different combinations of two products yielding the same degree of satisfaction. An isoquant represents a measurable quantity, while an indifference curve represents unquantifiable value (or contentment).

Properties of Indifference Curve

Higher indifference curve yields a higher level of satisfaction than lower one 

This is because on the higher indifference curve, more units of both items are consumed. The indifference curves IC1 and IC2 are where the points A and B in the figure are located. At point A, we have OY1 units of good Y and OX1 units of good X. At point B, we have OX2 units of goods X and OY1 units of good Y. In this case, the quantity of good Y (OY1) is equal at both points A and B. However, point B has X1X2 additional units of excellent X. As a result, it will produce a greater degree of satisfaction.

Two indifference curve cannot cut each other 

Additionally, two difference curves cannot intersect. We will get an inconsistent outcome and there will be a contradiction if they cross or cut each other. The indifference curve IC1 in the figure displays 100 units of contentment, while IC2 displays 100 units of satisfaction generated by different combinations of good X and good Y. There is inconsistency at point A. As a result, the indifference curves cannot cross one another.

Indifference curves are convex to the origin 

The indifference curve is always convex to the origin because of how the falling marginal rate of substitution operates. MRS is the rate at which the marginal utilities of one thing can be replaced by the marginal utilities of another good. However, the degree of satisfaction stays stable or unchanged. The marginal rate of technological substitution (MRTS) of good X for good Y drops or decreases in the figure as the customer advances from point A to point B, from point B to point C, and from point C to point D in the indifference curve IQ1. The MRTS decreases because there is no substitution between the two items. The graphic shows that for every unit rise in good X by (X), there will be a corresponding unit drop in good Y (Y). Because the indifference curve is always convex to the origin, MRTS must decrease.

Indifference curves are negatively sloped 

A curve of indifference slopes downhill from right to left. The declining marginal rate of substitution theory is to blame. A decrease in the consumption of one good must be balanced out by an increase in the consumption of another good in order to retain the same degree of satisfaction. The graphic illustrates how, in order to retain the same level of utility or happiness when the customer moves from point A to point B, the consumption of good X labor increases but the units of good Y drop. The following diagrams can be used to illustrate how an indifference curve cannot be horizontal, vertical, or upward sloping.

Reference

Koutosoyianis, A (1979), Modern Microeconomics, London Macmillan