Indifference Curve

In order to understand an individual’s work-leisure decision, we use indifference curve analysis to explain
their responses. Indifference curve analysis consists of two concepts: indifference curve and budget
constraint. A person will make their decision through the combination of the consumption of leisure and
goods, in which we can analyse their work-leisure decision through a combination of their budget
constraints and their indifference curves. An indifference curve shows a combination of two goods that
give a consumer equal satisfaction and utility thereby making the consumer indifferent.

For Example: a person’s level of utility is 20,000 utils, and the person is consuming $600 worth of
consumption and 100 hours of leisure weekly. The same individual could gain 25 hours more leisure
time weekly by giving up $300 worth of consumption while still maintain their level of 20,000 utils. The
locus of such points is called an indifference curve —and all points along this curve yield 20,000 utils.

Points X and Y lie on the same indifference curve and yield the same level of utility (20,000 utils); point
Z lies on a higher indifference curve and yields more utility (45,000 utils). Suppose that the person was
instead consuming $400 worth of goods and 150 hours of leisure (point Z in the figure). This
consumption basket would put the person on a higher indifference curve, yielding 45,000 utils, hence a
higher satisfaction or happiness when compared to 25,000 utils.

Indifference curves have four important properties:

1. Indifference curves are downward sloping – we assume that individuals prefer more of
consumption and leisure. The only way that we can offer a person a few more hours of leisure, and
still hold utility constant, is to take away some of the goods.

2. Higher indifference curve indicates higher levels of utility – refer to example above, the
indifference curve that yields 45,000 utils is more satisfactory when compared to the indifference
curve that yields 20,000 utils because it allows a person to consume more goods and leisure.

3. Indifference curve do not intersect - Indifference curves that intersect contradict our assumption
that individuals like to consume both goods and leisure.
4. Indifference curves convex to the origin - It turns out that indifference curves must be convex to
the origin if we are ever to observe a person sharing her time between work and leisure activities.