Indifference Curve Analysis
The aim of indifference curve analysis is to analyse how a rational consumer chooses between two goods. In other words, how the change in the wage rate will affect the choice between leisure time and work time.Indifference analysis combines two concepts; indifference curves and budget lines(constraints)
The indifference curve
An indifference curve is a line that shows all the possible combinations of two goods between which a person is indifferent. In other words, it is a line that shows theconsumption of different combinations of two goods that will give the same utility(satisfaction) to the person.For instance, in Figure 1 the indifference curve is I1. A person would receive the sameutility (satisfaction) from consuming 4 hours of work and 6 hours of leisure, as they wouldif they consumed 7 hours of work and 3 hours of leisure.Figure 1: An indifference curve for work and leisureAn important point is to remember that the use of an indifference curve does not try to put a physical measure onto how much utility a person receives.
The shape of the indifference curve
Figure 1 highlights that the shape of the indifference curve is not a straight line. It isconventional to draw the curve as bowed. This is due to the concept of the diminishingmarginal rate of substitution between the two goods.The marginal rate of substitution is the amount of one good (i.e. work) that has to be givenup if the consumer is to obtain one extra unit of the other good (leisure).The equation is below
The marginal rate of substitution (MRS) = change in good X / change in good Y
Using Figure 1, the marginal rate of substitution between point A and Point B is;MRS = -3 / 3 = -1 = 1 Note, the convention is to ignore the sign.