Developed first by Francis Ysidro Edgeworth in his seminal 1881 book, the theory of

indifference curves is a vital component of ordinal utility and consumer theory. Used worldwide
to predict and judge consumer behaviour, the approach prefers the study of consumer
preferences, instead of measuring them in terms of money.
An indifference curve is a graphical representation that explores how a consumer may be
indifferent to two goods or products that give him or her the same level of customer satisfaction
and utility. Such a graph is a self-serving device prominently used in microeconomics to explain
consumer preferences and budget constraints. Besides these, the other applications of
indifference curves include welfare economics and the marginal utility theory.

Indifference Curve Analysis

An indifference curve is functional under many assumptions, that is, each indifference curve
starts as a convex structure from the origin, and there is no intersection between any pair of
indifference curves. It is assumed that consumers are more satisfied when buying goods on a
high indifference curve.
The Following Example Helps Illustrate This:
Samaira, has 1 unit of food and 12 units of books. When asked how many units of books she is
willing to give up in exchange for an additional unit of food, she responds saying she could give
up 6 units of books for an additional unit of food. Thus we have two situations at hand:
a. Samaira gains satisfaction from having 1 unit of food and 12 units of books.
b. She is also satisfied with 2 units of food and 6 units of books.
As Samaira is faced with more such questions, an interesting scenario is observed:

Combinatio Food Books

n

A 1 12

B 2 6

C 3 4

D 4 3

The analysis of an indifference curve can be carried out on a simple two-dimensional graph.
Each axis indicates a specific type of product. If the graph lies on a curve or line, it suggests that
the consumer has almost no preference for any product, because all of the products deliver the
same kind of satisfaction or utility to the consumer. 
Samaira’s indifference can be analysed with the following graphical representation of her
indifference curve.
The diagram shows an Indifference curve (IC). Any combination lying on this curve gives the same
level of consumer satisfaction. Another name for it is Iso-Utility Curve.

Any combination lying on Samaira’s Indifference Curve yields the same kind of satisfaction to
her. It is also called an Iso-Utility Curve.
Other indifference curve examples would include a teenager who might be indifferent between
owning two band tee-shirts and one novel, or four novels and one band tee-shirt.

What is an Indifference Map?

A set of multiple indifference curves is known as an Indifference Map. This map demonstrates a
summary of the consumer’s preferences for a product or set of products. Here’s a diagram to
help you understand an indifference map better:  
Indifference Map-Image
The figure above, consisting of three indifference curves speculates the view that a consumer is
indifferent to the combinations of products on the same indifference curve. Also, a consumer,
say Samaira, would prefer the combinations on the higher indifference curve to the ones on the
lower curves. A higher indifference curve indicates higher levels of satisfaction – combinations
on IC2 yield greater satisfaction than those on IC1. 
Now that you know what an indifference curve is and how to analyse one, it’s time to revise a
few concepts.
Test Your Knowledge:
 1. The further an IC is from its origin, the ________ :
a. higher is the satisfaction level
b. lower the satisfaction level
c. same satisfaction levels are obtained
d. None of these
2. Does an indifference curve exhibit various possible combinations of two products that
yield equal satisfaction to the consumer?
a. Yes
b. No

What is the Marginal Rate of Substitution?

The MRS or Marginal Rate of Substitution can be defined as the rate at which a consumer is
prepared to exchange a product, M for another product, N. It can also be denoted by the slope of
the curve. To understand this, let’s take a close look at Samaira’s situation.
Change Y upon Change X

Combinatio Food Books MRS

n

A 1 12 12

B 2 6 6

C 3 4 2

D 4 3 1

As mentioned above, Samaira initially agreed to give up 6 units of books in exchange for an
additional unit of food. Hence, the MRS for Samaira is 6. From the table, you can observe that in
subsequent combinations, the MRS is 2 and 1. 
Thus the MRS of a product M for N is the quantity of N that can be compensated by an
additional unit of M. Both situations yield the same level of satisfaction to the consumer in
question. To help make this clear, it is imperative to learn the fundamental properties of
indifference curves that are clarified in the next section.
But before you start off with the varied characteristics of indifference curve, it is important to
first understand the following points:
 1. As Samaira is handed more units of food, she increasingly feels a desire for more and
more units of food.
2. Most of the products, the books and the food, are really very flawed substitutes for one
another. If these could be substituted perfectly, the MRS would remain the same.
Test Your Knowledge:
1. What is the shape of the indifference curve, when the MRS between product M and
product N diminishes?
a. Convex to the origin
b. Concave to the origin
c. A straight line
d. None of these
Features of Indifference Curve
Several analyses of indifference curves have deducted the fact that as a consumer’s income
drastically increases, the curve moves higher up the graph because a higher income means that
the consumer can now afford more of each product. Studies suggest that the maximum
consumption of goods take place at the point where the consumer’s indifference curve is sharply
tangent with their spending capacity or budget.
The following section throws light on the many indifference curve properties:
1. It has been observed that an IC predominantly slopes downwards, to the right. This
means that when the quantity of one product in combination with another is increased,
the quantity of the other significantly decreases.
2. From Samaira’s example above, you learnt that as she trades in more and more clothing
for food, she is willing to part with less clothing. This indicates a decreasing MRS. This
diminishing rate leads to the convex shape of the indifference curve. Also:
i. If two products can be perfectly replaced with each other, the indifference curve turns out
to be a straight line with a constant value of MRS.
ii. If two products are perfect complements of each other, say a phone and a tablet, then in
such a case, the curve is L-shaped and convex to the origin.
3. A higher curve means a higher level of satisfaction, in contrast to a lower curve.
3. It is generally known that two Indifference Curves never intersect each other. They may
not always be parallel to each other as well. 
3. An indifference curve never touches the axis.
Now that you are well-versed with the many intricacies of an indifference curve, you can hover
to the NCERT notes and solutions available on the website, sample papers and reference notes
for a more comprehensive learning experience. Previous years’ question papers and live demo
classes on the app make learning so much more fun. For more on the theory of consumer
behaviour and cardinal utility, install the Vedantu app on your device today.
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FAQs (Frequently Asked Questions)

1. What is an Indifference Curve?

An indifference curve is a graph indicating the combination of all products that yield the same
level of customer satisfaction to a consumer. Since all the goods give the consumer the same
amount of satisfaction, making him or her indifferent to them, it is called an indifference curve.

2. Explain the Properties of an Indifference Curve.

What is an Indifference Curve?

An indifference curve is a curve that represents all the combinations of goods that give the same
satisfaction to the consumer. Since all the combinations give the same amount of satisfaction, the
consumer prefers them equally. Hence the name indifference curve.

Here is an example to understand the indifference curve better. Peter has 1 unit of food and
12 units of clothing. Now, we ask Peter how many units of clothing is he willing to give up
in exchange for an additional unit of food so that his level of satisfaction remains unchanged.

Peter agrees to give up 6 units of clothing for an additional unit of food. Hence, we have two
combinations of food and clothing giving equal satisfaction to Peter as follows:

1. 1 unit of food and 12 units of clothing

2. 2 units of food and 6 units of clothing

By asking him similar questions, we get various combinations as follows:

Combination Food Clothing

 A 1 12

B 2 6

C 3 4

D 4 3

Indifference Map

An Indifference Map is a set of Indifference Curves. It depicts the complete picture of a consumer’s
preferences. The following diagram showing an indifference map consisting of three curves:
We know that a consumer is indifferent among the combinations lying on the same indifference
curve. However, it is important to note that he prefers the combinations on the higher indifference
curves to those on the lower ones.

This is because a higher indifference curve implies a higher level of satisfaction. Therefore, all
combinations on IC1 offer the same satisfaction, but all combinations on IC2 give greater
satisfaction than those on IC1.

Any straight line drawn from the origin through the indifference curves is known as the income
consumption line or price consumption curve.

Marginal Rate of Substitution

This is the rate at which a consumer is prepared to exchange a good X for Y. If we go back to
Peter’s example above, we have the following table:

Combination Food Clothing MRS

A 1 12 –

B 2 6 6
 C 3 4 2

D 4 3 1

In this example, Peter initially gives up 6 units of clothing to get an extra unit of food. Hence, the
MRS is 6. Similarly, for subsequent exchanges, the MRS is 2 and 1 respectively. Therefore, MRS of
X for Y is the amount of Y whose loss can be compensated by a unit gain of X, keeping the
satisfaction the same.

Interestingly, as Peter accumulates more units of food, the MRS starts falling – meaning he is
prepared to give up fewer units of clothing for food. There are two reasons for this:

1. As Peter gets more units of food, his intensity of desire for additional units of food
decreases.

2. Most of the goods are imperfect substitutes for one another. If they could substitute one
another perfectly, then MRS would remain constant.
Properties of an Indifference Curve or IC

Here are the properties of an indifference curve:

An IC slopes downwards to the right

This slope signifies that when the quantity of one commodity in combination is increased, the
amount of the other commodity reduces. This is essential for the level of satisfaction to remain the
same on an indifference curve.

An IC is always convex to the origin

From our discussion above, we understand that as Peter substitutes clothing for food, he is willing to
part with less and less clothing. This is the diminishing marginal rate of substitution. The rate gives
a convex shape to the indifference curve. However, there are two extreme scenarios:

1. Two commodities are perfect substitutes for each other – In this case, the indifference
curve is a straight line, where MRS is constant.

2. Two goods are perfect complementary goods – An example of such goods would be
gasoline and water in a car. In such cases, the IC will be L-shaped and convex to the origin.
Indifference curves never intersect each other

Two ICs will never intersect each other. Also, they need not be parallel to each other either. Look at
the following diagram:

Fig 3 shows two ICs intersecting each other at point A. Since points A and B lie on IC1, they give
the same satisfaction level to an individual. Similarly, points A and C give the same satisfaction
level, as they lie on IC2. Therefore, we can imply that B and C offer the same level of satisfaction,
which is logically absurd. Hence, no two ICs can touch or intersect each other.

A higher IC indicates a higher level of satisfaction as compared to a lower IC

A higher IC means that a consumer prefers more goods than not.

An IC does not touch the axis

This is not possible because of our assumption that a consumer considers different combinations of
two commodities and wants both of them. If the curve touches either of the axes, then it means that
he is satisfied with only one commodity and does not want the other, which is contrary to our
assumption.

Budget Line (This indicates the income of the consumer, aka price line)

Since a higher indifference curve represents a higher level of satisfaction, a consumer will try to
reach the highest possible IC to maximize his satisfaction. In order to do so, he has to buy more
goods and has to work under the following two constraints:

1. He has to pay the price for the goods and

 2. He has limited income, restricting the availability of money for purchasing these goods

As can be seen above, a budget line shows all possible combinations of two goods that a consumer
can buy within the funds available to him at the given prices of the goods. All combinations that are
within his reach lie on the budget line.

A point outside the line (point H) represents a combination beyond the financial reach of the
consumer. On the other hand, a point inside the line (point K) represents under-spending by the
consumer.

Solved Question on Indifference Curve

Q: What are the assumptions underlying the indifference curve approach?

Ans: The assumptions are as follows,

 The consumer is rational. Also, he possesses full information about all the relevant aspects
of the economic environment in which he lives.

 The consumer can rank combination of goods based on the satisfaction they yield.
However, he can’t quantitatively express how much he prefers a certain good over the other.

 If a consumer prefers A over B and B over C, then he prefers A over C.

 If a combination X has more commodities than the combination Y, then X is preferred

over Y.
Marginal utility theory
Marginal utility theory examines the increase in satisfaction consumers gain from
consuming an extra unit of a good.

 Utility is an idea that people get a certain level of

satisfaction/happiness/utility from consuming goods and service.
 Marginal utility is the benefit of consuming an extra unit
This utility is not constant. Often we get diminishing marginal utility. The first
piece of chocolate cake gives more utility than the 7th piece.

In the above example, total utility (300) is maximised after just four pieces of
chocolate cake.

The fifth piece of chocolate cake gives zero marginal utility, so we are indifferent
between 4 pieces and five pieces.

However, if we eat the sixth piece of chocolate cake, we start to feel ill – and so
we get negative utility

Utility and price

 One way to measure utility is to give the utility a monetary value.

 For example, if I would pay £0.90 for a piece of cake, then we can say the
utility is at least £0.90
How much to consume?
  In the above example, if a piece of cake cost £0.90, it would make sense
to consume two pieces.
 The first piece gives 120p of utility – which is greater than the price of 90p.
 The second piece gives a utility equal to the price.
 The third piece would give marginal utility of only 60p – which is less than
the price of 90p
Marginal utility and allocative efficiency

Suppose the consumption was a quantity of 40. At this quantity, the price is £15,
but the marginal cost is £6. In this case, the marginal benefit (utility) is greater
than the marginal cost – there is a deadweight welfare loss and
underconsumption of the good.
 All
ocative efficiency will occur at an output of 70 where MC=MY of £11.

Consumer surplus

This is the excess of what a consumer would have been prepared to pay
compared to what they actually pay.
A Person’s Consumer Surplus from Petrol

 In the above diagram, at Q 500 litres, the MU is 80p > than the price = 50p.
 Therefore, a rational consumer will increase consumption of petrol, until
the MU of petrol equals the price at 50p and a quantity of 800.
 Marginal Consumer Surplus = The excess of a person’s total utility from
the consumption of a good (MU) over the price paid: MCS = MU – P
The optimum level of consumption

For one good, the optimum level of consumption would be to consume a quantity
of the good unto the point where MU = Price.

There’s no point paying 75p for cake if it only gives us 50p worth of utility.

Demand curve and Marginal Utility

Our demand curve is derived from our marginal utility.

If a good gives us more satisfaction, e.g. it becomes more fashionable, our MU

and demand curve will shift to the right.

Choosing between different goods

In the real world, we are not just deciding how much of one good to buy. We are
also deciding how to choose between different combinations of goods.

The Equi-Marginal principle in consumption states that consumers will maximise

total utility from their incomes by consuming that combination of goods where:
MUa = MUb
—–     —
Pa = Pb

For example, suppose bread = £1 and Chicken = £2.

 Chicken is twice as expensive. Therefore, it would make sense to choose

a quantity of chicken, where the marginal utility of chicken was twice the
MU of bread.
 Therefore, you would tend to buy less chicken to make sure the marginal
utility of chicken justified its higher price.
 If chicken was giving three times as much marginal utility but was only
twice as expensive, it would make sense to buy more chicken until the
marginal utility fell to that ratio.
Defining utility

 Utilitarianism of Bentham and Mill – the accumulation of pleasure and

subtraction of pain.
 Cardinal utility – Neoclassical economists such as Alfred Marshall, Leon
Walrus, and Carl Menger argued that utility could be measured in a
quantifiable measure (utils)
 Ordinal utility – Hicks argued that consumers struggled to give definitive
utils but could put different choices in order preferences. J.R. Hicks
developed this theory of ordinal utility.
 Satisfaction of wants. Austrian school – Von Mises also argued it was
harder to quantify utility.He proposed that the satisfaction of wants could
be measured to some extent but after that it was difficult.