Indifference Curve Properties MBA Economics Notes

Mon, 12/19/2011 - 07:03 -- Umar Farooq

Indifference Curves

Each point in the diagram stands for a basket of meat and ghee (cooking oil) A, B, C, D are all baskets among which a certain consumer is indifferent. All give equal utility. These points and all others on a smooth curve connecting them constitute an indifference set. An indifference curve is a graphical representation of an indifferent set.

Indifference Curve Properties

Following are the indifference curve properties:

1. If two commodities are perfect substitute the indifference curve is a straight line.

 

2. When two commodities are not substitutable then the shape is represented by two vertical and horizontal lines.

3. In more typical cases, in which the two commodities can be substituted for each other but are not perfect substitutes, the indifference curve will be curved as

4. The more easily the two commodities can be substituted for each other the nearer will the curve approach straight line.

5. Indifference curves normally slope downward, the upward sloping portion of curve shown here s impossible. Basket A has more goods than basket B and therefore it could not be on the same indifference curve.  The indifference curves have normally negative slops – sloping downward.

6. The absolute value of the slope of an indifference curve at any point represents the ratio of the marginal utility of the good and on the horizontal axis to the marginal utility of the good on the vertical axis. The rate at which one good can be substituted for the other without gain or loss in satisfaction is called marginal rate of substitution.

7. Indifference curves are convex, that is, their slope decrease as one moves down and to the right along them. The implies that the ratio of the marginal utility of meat to the marginal utility of the ghee (cooking oil) also known as marginal ratio of substitution of meat for ghee (cooking oil) diminishes as one moves down and to the right along the curve.

8. Indifference curves can be drawn through the point that represents the basket of goods whatsoever.

Multiple indifference Curves. An indifference curve can be drawn through any point. IC1 represents the indifference set D,C,B,A while IC2 represents the basket or indifference set G,F,E. All points on IC2 are preferred to all points on IC1. The group of indifference curves is called an indifference map.

9. Indifference curves do not cross each other because consumer preferences are transitive, that is, if you prefer A to B and B to c, you prefer A to C. Here A and B are on IC1, so the consumer is difference between them.  A and C are both on IC2, so the consumer must be different between them. Transitivity implies that consumer is indifferent between B and C but it is impossible because “C” contains more of both goods.

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