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ECONOMICS GUIDE TO MICROECONOMICS

Indifference Curves in
Economics: What Do They
Explain?
By CAROLINE BANTON Updated August 30, 2022

Reviewed by ROBERT C. KELLY

Fact checked by KIRSTEN ROHRS SCHMITT

Investopedia / Paige McLaughlin

What Is an Indifference Curve? Advertisement

An indifference curve is a chart showing various combinations of two goods or

commodities that leave the consumer equally well off or equally satisfied—
hence indifferent—when it comes to having any combination between the two
items that is shown along the curve.

For instance, if you like both hot dogs and hamburgers, you may be indifferent
to buying either 20 hot dogs and no hamburgers, 45 hamburgers and no hot
dogs, or some combination of the two—for example, 14 hot dogs and 20
hamburgers (see point “A” in the chart below). Either combination provides the
same utility.

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KEY TAKEAWAYS
An indifference curve shows a combination of two goods in various
quantities that provides equal satisfaction (utility) to an individual.
It is used in economics to describe the point where individuals have no
particular preference for either one good or another based on their
relative quantities.
Along the curve, a consumer thus has an equal preference for the
various combinations of goods shown.
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Typically, indifference curves are shown convex to the origin, and no
two indifference curves ever intersect.

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Understanding Indifference Curves

Standard indifference curve analysis operates using a simple two-dimensional
chart. Each axis represents one type of economic good. Along the indifference
curve, the consumer is indifferent between any of the combinations of goods
represented by points on the curve because the combination of goods on an
indifference curve provides the same level of utility to the consumer.

For example, a young boy might be indifferent between possessing two comic
books and one toy truck, or four toy trucks and one comic book, so both of
these combinations would be points on an indifference curve of the young boy.

Indifference curves are heuristic devices used in contemporary microeconomics

to demonstrate consumer preference and the limitations of a budget.
Economists have adopted the principles of indifference curves in the study of
welfare economics.

Important: Indifference is conceptually incompatible with real-life

economic action. Every action that people take indicates a
preference, not indifference. Furthermore, people’s relative
preferences have been found to change over time and depending on
their social context.

Indifference Curve Analysis

Indifference curves operate under many assumptions; for example, each
indifference curve is typically convex to the origin, and no two indifference
curves ever intersect. Consumers are always assumed to be more satisfied
when achieving bundles of goods on indifference curves that are farther from
the origin.

As income increases, an individual will typically shift their consumption level

because they can afford more commodities, with the result that they will end
up on an indifference curve that is farther from the origin—hence better off.

Many core principles of microeconomics appear in indifference curve analysis,

including individual choice, marginal utility theory, income, substitution
effects, and the subjective theory of value. Indifference curve analysis
emphasizes marginal rates of substitution (MRS) and opportunity costs.
Indifference curve analysis typically assumes that all other variables are
constant or stable. [1]

Most economic textbooks build upon indifference curves to introduce the

optimal choice of goods for any consumer based on that consumer’s income.
Classic analysis suggests that the optimal consumption bundle takes place at
the point where a consumer’s indifference curve is tangent with their budget
constraint.

Marginal Rate of Substitution (MRS)

The slope of the indifference curve is known as the marginal rate of
substitution (MRS). The MRS is the rate at which the consumer is
willing to give up one good for another. For example, a consumer
who values apples will be slower to give them up for oranges, and
the slope will reflect this rate of substitution.

Criticisms and Complications of the Indifference

Curve
Indifference curves, like many aspects of contemporary economics, have been
criticized for oversimplifying or making unrealistic assumptions about human
behavior. [2] For example, consumer preferences might change between two
different points in time, rendering specific indifference curves practically
useless. Other critics note that it is theoretically possible to have concave
indifference curves or even circular curves that are either convex or concave to
the origin at various points.

What does an indifference curve explain?

An indifference curve is used by economists to explain the tradeoffs that people
consider when they encounter two goods that they wish to buy. Because people
are constrained by a limited budget, they cannot purchase everything. Instead,
a cost-benefit analysis must be considered. Indifference curves visually depict
this tradeoff by showing which quantities of two goods provide the same utility
to a consumer (i.e., where they remain indifferent).

What is the formula for an indifference curve?

The formula used in economics for constructing an indifference curve is:

𝑈(𝑡, 𝑦)=𝑐

where:

c stands for the utility level achieved on the curve and is constant.
t and y are the quantities of two different goods, t and y.

Different values of c correspond to different indifference curves, so if we

increase our expected utility, we obtain a new indifference curve that is plotted
above and to the right of the previous one. [3]

What are the properties of indifference curves?

Indifference curves assume that individuals have stable and ordered
preferences and seek to maximize their utility. As a result, indifference curves
will have these four properties:

The indifference curve is downward-sloping.

The slope of the indifference curve is convex.
Curves plotted higher and farther to the right correspond with higher levels
of utility.
Various indifference curves can never cross or overlap.

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