Indifference Curve

Analysis
Kamal Singh
Lecturer in Economics

Contents

What is Indifference curve

Marginal Rate of Substitutions
Properties of IC
Budget Constraints
Consumer Equilibrium with IC
Analysis

Ordinal utility analysis

The concept of Cardinal Utility was used by Marshal to
define Consumer's Equlibrium. Cardinal Utility means
consumer could measure the satisfaction derived by the
consumption of any goods or services in terms of number
and unit of that measurment is Utils or the Money.
Where as Ordinal Utility means giving the rank to the
utility dervied by the consimption of goods and services.
This Concept was given by J.R. Hicks. This is more
realstic and better than cardinal utility. This is totally
based on Introspection.

 Indifference analysis is an alternative

way of explaining consumer choice
that does not require an explicit
discussion of utility.
Indifferent: the consumer has no
preference among the choices.
Indifference curve: a curve showing all
the combinations of two goods (or
classes of goods) that the consumer is
indifferent among.

Assumptions
Rational Consumer Ordinal Utility NonSatiety (More is Preferred to Less)
Diminishing Marginal Rate of
Substitution.
Consistency: If a consumer prefer A to
B in one period then he will not prefer
B to A in another period.
Transitivity: If a consumer prefer A to B
and B to C, then he must prefer A to C.

Combination

Oranges

Apples MRS

10

10:1

4:1

3:1

2:1

Marginal Rate of
Substitution
Marginal rate of substitution the
rate at which one good must be
added when the other is taken away
in order to keep the individual
indifferent between the two
combinations.

Indifference Map
An indifference map is a complete set of
indifference curves.
It indicates the consumers preferences
among all combinations of goods and
services.
The farther from the origin the indifference
curve is, the more the combinations of
goods along that curve are preferred.

Copyright Houghton Mifflin Company. All

rights reserved.

Properties of ICs
The indifference curves are not likely to be
vertical, horizontal, or upward sloping.
A vertical or horizontal indifference curve holds the
quantity of one of the goods constant, implying that the
consumer is indifferent to getting more of one good
without giving up any of the other good.
An upward-sloping curve would mean that the consumer
is indifferent between a combination of goods that
provides less of everything and another that provides
more of everything.
Rational consumers usually prefer more to less.

 The slope or steepness of indifference curves

is determined by consumer preferences.
It reflects the amount of one good that a consumer must
give up to get an additional unit of the other good while
remaining equally satisfied.
This relationship changes according to diminishing
marginal utilitythe more a consumer has of a good, the
less the consumer values an additional value of that
good. This is shown by an indifference curve that bows
in toward the origin.

Indifference Curves:
No Crossing Allowed!
Indifference curves cannot cross.
If the curves crossed, it would mean that the
same bundle of goods would offer two different
levels of satisfaction at the same time.
If we allow that the consumer is indifferent to
all points on both curves, then the consumer
must not prefer more to less.
There is no way to sort this out. The consumer
could not do this and remain a rational
consumer

Higher indifference curve represents

higher satisfaction . This is because
the combinations lying on higher
indifference curve contain more of
either one or both goods and more is
always preferred to less. More is
preferred to Less Indifference map

Indifference Map
An indifference map is a complete set
of indifference curves.
It indicates the consumers
preferences among all combinations of
goods and services.
The farther from the origin the
indifference curve is, the more the
combinations of goods along that
curve are preferred

Budget Constraint
The indifference map only reveals the
ordering of consumer preferences
among bundles of goods. It tells us what
the consumer is willing to buy.
It does not tell us what the consumer is
able to buy. It does not tell us anything
about the consumers buying power.
The budget line shows all the
combinations of goods that can be
purchased with a given level of income

 The mathematical expression for budget

constraint is:
M= Px X + Py Y
Y= M/Py Px/Py
Example: Y = Rs 200
Px= Rs 2
Py= Re1

Consumer Equilibrium
The indifference map in combination with
the budget line allows us to determine
the one combination of goods and
services that the consumer most wants
and is able to purchase. This is the
consumer equilibrium.
The demand curve for a good can be
derived from indifference curves and
budget lines by changing the price of one
of the goods (leaving everything else the
same) and finding the equilibrium points.

Consumer Equilibrium

Deriving the Demand Curve