Unit I Indifference Curve

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. The following indifference schedule shows all the combinations giving equal
satisfaction to a consumer.
Indifference Schedule
Combination of Apples Apples Bananas
and Bananas (A) (B)
P 1 15
Q 2 10
R 3 6
S 4 3
T 5 1
From the schedule, it is clear that 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 the above figure.
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 (IC1). 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’.
Properties of Indifference Curves:
1. Indifference curves are always convex to the origin:
An indifference curve is convex to the origin because of diminishing MRS and MRS declines
continuously because of the law of diminishing marginal utility. For example, 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.
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. For example, considering point ‘A’ on ICX and point ‘B’ on IC2. 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.
For example, in the above figure, satisfaction from point A and from B on IC 1 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 indifference curves cannot intersect each other.
BUDGET LINE:
Budget line of a consumer, consists of all possible combinations of the two commodities that the
consumer can purchase with a limited budget. Consumer would reach equilibrium point, i.e. highest
level of satisfaction given all constraints at the highest indifference curve he/she can reach. Budget
constraint depends upon income of the consumer and prices of the commodities in the consumption
basket.
Quantity
of N
A
B Qua
ntity of M

Unit I Indifference Curve

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Meaning of Indifference Curve:

From the schedule, it is clear that consumer is indifferent

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