INDIFFERENCE CURVE AND INDIFFERENCE MAP: MEANING AND PROPERTIES

The budget constraints discussed previously show the plausible combination of two goods that is purchasable by a consumer given the consumer income.

However, income is not the only factor that determines consumer demand, Consumer preference also determines demand.

This consumer preference is best represented on a graph called the indifference curve.

Indifference curves show the combination of two goods that will give the consumer the same level of satisfaction.

In other words, an indifference curve shows the combination of two goods that will give the consumer equal utility.

It shows the combination of two goods to which a consumer is indifferent, that is, the consumer will just be happy with any combination of the two goods on the indifference curve.

An indifference curve is usually drawn from the indifference schedule or the tabular representation of the bundle of two goods that gives the consumer the same level of satisfaction.

Combinations good Xgood Y
L 118
M213
N 39
P46
Q 54
R 63

The consumer is indifferent to the various combination whether he buys combination L(1 unit of good X and 13 units of Good Y) or M(2 units of a good, he earns the same level of satisfaction. This means the consumer will just be happy consuming combination L or any other combinations irrespective of the alteration in the quantity

If we were to represent this information on an indifference curve, this is the way it will look like.

Indifference curve
Figure A

The above indifference curve is just one of many indifference curves that can apply to a consumer. It is, for this reason, we have an indifference map.

An indifference map ranks the various indifference curves that may apply to a consumer about two goods.

Figure B depicts an indifference map. The higher curves represent a higher level of satisfaction because they contain more quantity of goods X and Y. 

In the accompanying map, all points on IC3 are preferred over points on IC2 or IC1. In the same token, all points on IC2 are preferred to point of IC1.

    

Properties Of Indifference Curve

1. Indifference curves are negative-sloped: Just like PPC, indifference curves are negatively sloped. They sloped downward from left to right. 

The intuition for this is based on the assumption a consumer would require more of one good, say X, and less of another good, say Y if he is to maintain the same level of satisfaction.

2. The slope of the indifference curve: The slope of an indifference curve is called the marginal rate of substitution.

This slope is very important for one reason: it shows the rate at which one good, say X is substituted for another good Y. 

This is the case in Figure A. In combination, M, the consumer is willing to give up 5 units of Good Y to consume 1 more unit of good X.

In combination N, the consumer is willing to give up 4 units of Good Y just to consume another unit of Good X and so on. 

Since the marginal rate of substitution shows the rate at which one good is substituted for another. It can, thus, be expressed mathematically as:

$MRS_{xy}=\frac{∆x}{∆y}$

Where ∆x is the change in the quantity of good X and ∆y is the change in the quantity of good Y.

Notice that as we move down the indifference curve, the marginal rate of substitution decreases. 

For example, At combination M in figure A, the marginal rate of substitution is 5. At combination N, the marginal rate of substitution was 4. At combination P, it was 3, and so on.

This observation of decreasing marginal rate of substitution is called the law of diminishing marginal rate of substitution.

3. Indifference curves are convex to origin: Because of the law of diminishing marginal rate of substitution, the indifference curve will become flattered as we moved further to the right.

This is because the slope of the indifference curve becomes smaller (due to the diminishing marginal rate of substitution) as we moved to the right.

4. Indifference curves cannot cross or intersect: if they do, they will represent a different level of satisfaction, which runs contrary to the basic premise of the indifference curve. 

Recall that an indifference curve shows the combination of two goods that will give the consumer equal satisfaction, not a different level of satisfaction. 

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