INDIFFERENCE CURVE

Indifference Curve

The points can be covered under this topic are given below:

• Definition

• Assumption of Indifference Curve

• Properties of Indifference Curve

Definition

The indifference curve is the curve which shows all the combination of two goods from which the consumer receive equal level of satisfaction. At a different combination on the same curve, the consumer has no preference for one combination of bundle of goods.

In other words, an indifference curve is the locus of various points that shows different combination of two goods that provide the same utility to consumer. The economists are used the principle of indifference curve in the study of welfare economics.


Assumption of Indifference Curve

1. The consumer always acts rationally to get maximum satisfaction.

2. IC shows only the combination of two goods.

3. The consumer have a complete information about the market prices.

4. The prices are always remains constant.

Properties of Indifference Curve

Property I: Indifference Curve Slopes Downward to Right

This property implies that indifference curve is negatively sloped.
It is based on the I assumption, which implies, if the consumer increases the consumption of one commodity then he/she must reduced the consumption of other in order to balancing the satisfaction level.
For Instance, a consumer consuming two goods (say X and Y), if the consumption of good 'X' is increased then automatically the consumption of the good 'Y' is reduced and vice-versa. This basically represents the downward sloping indifference curve.

Property II: Indifference Curve is Convex to the Point of Origin

This property represents that indifference curve is convex to the point of origin. This happens only due diminishing marginal rate of substitution (MRS) of commodities. This implies that the consumer is sacrificing more of one good in order to attain the satisfaction of other commodity.
For Instance, a consumer want to consumer more of good X and for this, he/she sacrifices some unit of good Y. This is called the diminishing marginal rate of substitution (MRSxy).

Property III: Indifference Curve Never Intersect each other

It is impossible for two indifference curve to intersect. To understand that case, we have to look at that what would happen if they intersect each other, then the combination will have to provide same level of satisfaction to the consumer, because the exact point where they intersect is point 'C'. Thus all other combination on both the curve must give same level of satisfaction. But if we compare point 'A' and 'B', we can see that, point 'B' provide more of good 'A' and 'C' as compared point 'A'. As we already knows that consumer always prefer larger quantity. So this situation cannot be possible.

Property IV: Indifference Curve Never Touches the Axis

One of the basic property of IC is that it never touches the horizontal or vertical axis. The main reason behind this property is that, as per the assumption of indifference curve, it only shows the combination of two goods. This property violates the assumption of the indifference curve.
In other words, consumer must have to purchased two commodities in order to compare it on both the axis.

As per the above figure, it shows that consumer purchases only the quantity of good X. The assumption of the IC says that IC shows only the combination of two goods. Here, consumer has to purchase the quantity of good Y too, to balancing the level of satisfaction. This property does not hold the assumption of the indifference curve. So such situation does not exists.

Property 5: Higher Indifference Curve, Higher Level of Satisfaction

Higher the indifference curve always give consumer, the higher level of satisfaction. This means that the IC which lies above the another IC will give higher level of satisfaction as compared as compared to the lower one. In other words, the combination of goods which is located on the high indifference curve will be preferred by the consumer.

In the above diagram, IC2 give consumer the higher satisfaction as compared to IC1. This will happens only when the income of the consumer is not changed (constant), but due to slightly changed in the prices of the commodities, consumer purchased more amount of good X and Y, which shifts indifference curve from IC1 to IC2.