INDIFFERENCE CURVE ANALYSIS

Farzana Yeasmin
Assistant Professor
Department of Agricultural Economics
Bangladesh Agricultural University, Mymensingh-2202
 Indifference curve
• An indifference curve is a locus of all combinations of two goods which yield
the same level of satisfaction (utility) to the consumers.
• Since any combination of the two goods on an indifference curve gives equal
level of satisfaction, the consumer is indifferent to any combination he
consumes. Thus, an indifference curve is also known as ‘equal satisfaction
curve’ or ‘iso-utility curve’.
• On a graph, an indifference curve is a link between the combinations of
quantities which the consumer regards to yield equal utility. Simply, an
indifference curve is a graphical representation of indifference schedule.
The table given below is an example of indifference schedule and the graph
that follows is the illustration of that schedule.
Table: Indifference schedule

Combination Mangoes Oranges

A 1 14
B 2 9
C 3 6
D 4 4
E 5 2.5

All these combinations yield equal satisfaction

to the consumer
Figure: Graphical representation of indifference curve
· Kindly remember when we talk about
indifference curve, we are concerned with
utility(satisfaction) only, not price.
· In Indifference curve IC1, all the points A,B,
C, D and E provides the consumer same level
of satisfaction. So, he can choose either of 5
.He is indifferent to any point on the curve
IC1. All points provide him the same level of
satisfaction
**An important point to remember is that
the use of an indifference curve does not try
to put a physical measure onto how much
utility a person receives.
Indifference Map
Definition: An Indifference Map is the
graphical representation of two or more
indifference curves showing the several
combinations of different quantities of
commodities, which consumer consumes,
given his income and the market price of
goods and services.

An Indifference Map is the collection of

indifference curves possessed by an
individual.
Indifference Map
• We can draw more than one indifference curve on the same
diagram. This family of curves is called indifference map.
• We know that right side curve yield higher utility and it goes on
increasing as we move righter, While the curve in the left yield
lesser utility and it goes on decreasing as we move towards left.
( the reason is right hand side point means more consumption of
either of 2 goods, hence higher satisfaction)
• IC1, IC2, IC3, IC4 are four indifference curves.
• All the points on IC2 will yield higher satisfaction than the points
on IC1 and
• All the points on IC3 will yield higher satisfaction than the points
on IC1 & IC2
• All the points on IC4 will yield higher satisfaction than the points
on IC1, IC2 & IC3.
 Properties of indifference curve

There are four basic properties of an indifference curve. These properties are:

I. Indifference curve slope downwards to right

II. Indifference curve is convex to the origin

III. Indifference curves cannot intersect each other

IV. Higher indifference curve represents higher level of satisfaction

I. Indifference curve slope downwards to right

• An indifference curve can neither be horizontal line nor an upward sloping

curve. This is an important feature of an indifference curve.

• When a consumer wants to have more of a commodity, he/she will have to give
up some of the other commodity, given that the consumer remains on the
same level of utility at constant income. As a result, the indifference curve
slopes downward from left to right.
I. Indifference curve slope downwards to right
• In the above diagram, IC is an indifference curve,
and A and B are two points which represent
combination of goods yielding same level of
satisfaction.

• We can see that when X1 amount of commodity X

was consumed, Y1 amount of commodity Y was also
consumed. When the consumer increased the
consumption of commodity X to X2, the amount of
commodity Y fell to Y2. And, thus the curve is
sloping downward from left to right.
 II. Indifference curve is convex to the origin

• As mentioned previously, the concept of indifference curve is based on the properties of

diminishing marginal rate of substitution.

• According to diminishing marginal rate of substitution, the rate of substitution of

commodity X for Y decreases more and more with each successive substitution of X for Y.

• Also, two goods can never perfectly substitute each other. Therefore, the rate of decrease
in a commodity cannot be equal to the rate of increase in another commodity.
II. Indifference curve is convex to the origin
Table: Indifference schedule • The table represents various combination of
commodity X and Y that gives a man same
Combination X Y level of utility. When the man consumes 1

A 1 12 unit of commodity X, he consumes 12 units

of commodity Y every day.
B 2 8 • When he started consuming 2 units of Y a

C 3 5 day, his consumption of Y dropped into 8

units a day. In the same way, we can see
D 4 3 other combinations as 3 units of X + 5 units
of Y, 4 units of X + 3 units of Y and 5 units of X
E 5 2
+ 2 units of Y.
II. Indifference curve is convex to the origin

• We can clearly see that the rate

of decrease in consumption of
Y is not the same as rate of
increase in consumption of
X.
• Similarly, rate of decrease in
consumption of Y has gradually
decreased even with constant
increase in consumption of X.
• Thus, indifference curve is
always convex (neither concave
nor straight).
III. Indifference curve cannot intersect each other

• Each indifference curve is a representation of particular level of satisfaction.

• The level of satisfaction of consumer for any given combination of two

commodities is same for a consumer throughout the curve. Thus, indifference

curves cannot intersect each other.

• The following diagram will help you understand this property clearer.
III. Indifference curve cannot intersect each other

• In the image, IC1 and IC2 are two indifference

curves and C is the point where both the curves
intersect.

• According to indifference curve theory, satisfaction

at point C = satisfaction at point A
Also, satisfaction at point C = satisfaction at point B
But, satisfaction at point B ≠ satisfaction at point A.

• Therefore, two indifference curves cannot intersect.

Yet, two indifference curves need not be parallel to
each other.
 IV. Higher indifference curve represents higher level of
satisfaction

• Higher the indifference curves, higher will be the level of

satisfaction. This means, any combination of two goods on the
higher curve give higher level of satisfaction to the consumer
than the combination of goods on the lower curve.
IV. Higher indifference curve represents higher level of satisfaction

• In the above figure, IC1 and IC2 are two indifference

curves, and IC2 is higher than IC1. We can also see
that Q is a point on IC2 and S is a point on IC1.
• Combination at point Q contains more of both the
goods (X and Y) than that of the combination at
point S. We know that total utility of commodity
tends to increase with increase in stock of the
commodity. Thus, utility at point Q is greater than
utility at point S, i.e. satisfaction yielded
from higher curve is greater than satisfaction
yielded from lower curve.
 Budget line
A Budget Line (budget constraints)
The budget line is an important component when analysing consumer behaviour.
The budget line illustrates all the possible combinations of two goods that can be
purchased at given prices and for a given consumer budget. The amount of a good
that a person can buy will depend upon his income and the price of the good he is
purchasing.
Now suppose an individual has a total income of Tk. 12 and he has to spend his income on
TWO commodities A and B. Price of A and B are Tk. 1.00 and Tk. 1.50 respectively.
Some possible combinations which can be formed in spending
the budget are as follows.

Units of A Units of B Total expenditure

• Now suppose an individual has
Price = 1.00 Tk. Price = 1.50 Tk. ( in Taka)
(1*X+ 1.5*Y=M) a total income of Tk. 12 and he
has to spend his income on 2
0 8 12
commodities A and B. Price of
3 6 12
A and B are Tk. 1.00 and Tk.
6 4 12
1.50 respectively.
9 2 12
12 0 12
• We can express the budget line through the following equation:
• Px.X+ Py.Y=M
• Where, M is the budget constraint and Px & Py are the prices of good
X and Y.
• So the slope of the budget line will be, Px/Py.
• In case of our example, the budget line can be expressed as:
• 1*X+ 1.5*Y=M
The table can be portrayed in the form of graph like:
• With a limited income of 12 Tk., The individual can buy either of the given combinations of
two commodities A and B.
• Any Point within the triangle is attainable by the consumer.

• Any point outside the triangle cannot be bought by the consumer with his limited income.

• At U, we have 10 units of A + 3 units of B; it would total cost 14.50 Tk.. So, this is
unattainable.

• So, we got to know that with a limited budget the consumer can only consume a limited
combination of A and B (the maximum combinations are on the actual budget line).
Consumer can buy more products with the increase in his income or decrease in the
prices.
• We can express the budget line through the following equation:

• Px.X+ Py.Y=M

• Where, M is the budget constraint and Px & Py are the prices of good
X and Y.

• So the slope of the budget line will be, Px/Py.

• In case of our example, the budget line can be expressed as:

• 1.5*X+ 1*Y=12
 Consumer’s Equilibrium: Interplay of Budget Line and
Indifference Curve
• Consumer’s Equilibrium
• The consumer is in equilibrium when he maximizes his utility, given his income and the market
prices. - Anna Koutsoyiannis

• Every consumer aims at getting maximum satisfaction out of his given expenditure. A
consumer is said to have attained equilibrium when he spends given income or budget in such
a way as to yield optimum satisfaction, given the prices of two goods and the consumer’s
preference.

• In simple words, a consumer is said to be in equilibrium when he is getting maximum

satisfaction out of his limited income.

• A consumer may find out his equilibrium condition with the help of indifference curve analysis.
 Assumptions
Consumer’s equilibrium through indifference curve analysis is based on the
following assumptions.
• The consumer is rational and seeks to maximize his satisfaction through
the purchase of goods.
• The consumer consumes only two goods (X and Y).
• The goods are homogenous and perfectly divisible.
• Prices of the goods and income of the consumer are constant.
• The indifference map for goods X and Y are given. The indifference map is
based on the consumer’s preferences for the goods.
• The preference or habit of the consumer does not change throughout the
analysis.
• The income of consumer is given and constant.
Conditions of Consumer’s Equilibrium

The following are the conditions of consumer’s equilibrium

• Budget line should be tangent to the indifference curve

• At the point of equilibrium, slope of the budget line = slope of the

indifference curve

• Indifference curve should be convex to the point of origin.

Equilibrium position: Indifference analysis

• Indifference analysis combines two concepts; indifference curves and

budget lines.
The first stage is to impose the indifference curve and the budget line
to identify the consumption point between two goods that a rational
consumer with a given budget would purchase.
The optimum consumption point is illustrated in the following
figure.
• The tangency point of indifference Map
and budget line gives us the
equilibrium position E.
• Indifference map intersects the budget
line at 3 points x , E and z.
• x and z lie on the lower indifference
curve than E lies on and hence gives
lesser utility than E. So, E is the optimum
consumption point.
Explanation

Consumer Behaviour - Aim of a consumer is to get maximum satisfaction from the

limited resources.
Budget Line- Budget line tell us all the combinations of two goods that can be
purchased with a given income.
Indifference Curve - An indifference curve is a locus of combination of points that
shows all the possible combinations of two goods which give him the same level of
satisfaction.

Now in the above diagram, we have 5 points X,Y,Z,E and D.

-Point D lies outside the budget of the consumer, hence can’t be achieved.
-Point Y lies inside the budget, but it would leave some of the money unspent. So,
we won’t go for it as it wont give the consumer maximum satisfaction.
Explanation
-With a limited income, X , Z and E can be achieved, but what would
the consumer choose is the question here.

- Points x and z lie on the lower indifference curve than the point E lies
on and hence gives lesser utility than E. So, E is the optimum
consumption point and the consumer will choose E.

- the point of tangency of indifference curve and budget line gives us

the equilibrium position for the consumer i.e. attaining maximum
satisfaction from the limited income.
Thanks to ALL