Indifference curve

INDIFFERENCE CURVE

DEFINITION: IC

An Indifference curve (IC) is the locus of all those combination of two goods which give the same level of satisfaction to the consumer.

Thus consumer is indifferent towards all the combinations lying on the same indifference curve. In other words, consumer gives equal preference to all such combinations.

INDIFFERENCE CURVES

1210 8 6 4 2 0

1 2 3 4 5 6

A(1, 22)

B(2,14)

C(3, 10)

24 22 20 18 16 14

D(4, 8

)

E(5, 7

)

Apples

INDIFFERENCE SCHEDULE(Table Showing Different

Combinations giving Equal Satisfaction)

Ora

nge

sCombination

Apples Oranges

A 1 22

B 2 14

C 3 10

D 4 8

E 5 7

INDIFFERENCE CURVES

INDIFFERENCE SCHEDULE

Combination Apples Oranges

A 1 22

B 2 14

C 3 10

D 4 8

E 5 7

1210 8 6 4 2 0

1 2 3 4 5

A(1, 22)

B(2,14)

C(3, 1

0)

24 22 20 18 16 14

D(4, 8

)

E(5, 7

)

ApplesOra

nge

s

IC1

MARGINAL RATE OF SUBSTITUTION (MRS)

The marginal rate of substitution of X for Y (MRSxy) is defined as the amount of Y, the consumer is just willing to give up to get one more unit of X and maintain the same level of satisfaction.

MRSMRSxyxy= Decrease in the Consumption of Y

Increase in the Consumption of X= (-) ∆Y

∆X

DIMINISHING MARGINAL RATE OF SUBSTITUTION

Combination Apples Oranges MRS

A 1 22 ---B 2 14 8:1C 3 10 4:1D 4 8 2:1E 5 7 1:1

As the consumer increases the consumption of apples, then for getting every additional unit of apples, he will give up less and less of oranges, that is, 8:1, 4:1, 2:1, 1:1 respectively This is the Law of Diminishing MRS.

LAW OF DIMINISHING MRS

MRS is measured by the slope of the indifference curve

MRS = -O/A = 8:1

1210 8 6 4 2 0

1 2 3 4 5

A

B

C

24 22 20 18 16 14

D

E

ApplesOra

nge

s

IC1

MRS = 2:1

MRS = 4:1

PROPERTIES OF IC

1. An Indifference curve has negative slope i.e. it slope downwards from left to right.

2. Indifference curve is always convex to the origin.

PROPERTIES OF IC

3. Two Indifference curves never each other.

PROPERTIES OF IC

4. Higher indifference curve represents higher satisfaction.

More is preferred to Less

Indifference map

PROPERTIES OF IC

5. Indifference curve touches neither X-axis nor Y-axis.

1210 8 6 4 2 0

1 2 3 4 5

ApplesOra

nge

s IC1

A(0, 10)X