Indifference

Curve Analysis
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Presented To:-Minakshi Soni By:- Kamal Sehrawat, Para

s
Key Concepts

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• What is an indifference curve?
• What is the marginal rate of substitution?
• What does the MRS equal?
• What is an indifference map?
• What is a budget line?
• What does the slope of the budget line equal?
• What conclusion can we draw?

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 What does this
appendix cover?
A method for determining
equal levels of satisfaction
or total utility for different
bundles of goods without
an exact measure of utils
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 What is an
indifference curve?
A curve showing the
different combinations of
two goods that provide
the same satisfaction or
total utility to a consumer
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 A Consumer’s Indifference Curve
An Indifference Curve for a Consumer

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A Choice

A
Steak

20
Lobster

4
Quantity of steak

B
B 15 6
C 10 10
15 D 5 12

C 7

10

5
D

4 8 12 16
Quantity of lobster 6
 What marginal rate
of substitution?
The rate at which a
consumer is willing to
substitute one good for
another good without a
change in total utility
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 What does the
MRS equal?
The MRS equals the slope
of an indifference curve
at any point on the curve

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What conclusion can
we make of
indifference curves?
The slope of the indifference
curve is negative and equal
to the marginal rate of
substitution (MRS), which
declines as one moves
downward along the curve
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 What is an
indifference map?
A selection of indifference
curves with each curve
representing a different
level of satisfaction or
total utility
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 What conclusion
can we make of
indifference maps?
Each consumer has a
set of indifference curves
that form a map
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Quantity of Steak A Consumer’s Indifference Map

8
6
4 I I1
4
I3
2 I2
I1
Q
1 2 3 4
Quantity of Lobster 12
What is a budget line?
A line that represents all
combinations of two
goods that a consumer
can purchase with a fixed
amount of money given
the price of each good
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Quantity of Steak A Consumer’s Budget Line

8
6 Budget
Line
4
2
Q
1 2 3 4
Quantity of Lobster 14
What does the slope of
the budget line equal?
The slope of the budget
line equals the ratio of the
price of good X on the
horizontal axis divided by
the price of good Y on the
vertical axis
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Slope of budget line

Price X
Price Y

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Quantity of Steak A Consumer’s Indifference Map

8
6
4 I I1
4
I3
2 I2
I1
Q
1 2 3 4
Quantity of Lobster 17
Quantity of Steak Deriving a Demand Curve

8
6
Y
X
4
I3
2
I1
Q
1 2 3 4 18
 Deriving a Demand Curve

$16
$12 X’
Y’
$8
$4
D

1 2 3 4
Quantity of Lobster 19
 What conclusion
can we draw?
Consumer equilibrium
occurs where the budget
line is tangent to the
highest attainable
indifference curve. At this
unique point, MRS = slope
(price ratio of Px/Py) 20
Summary

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An indifference curve is a curve
showing the different
combinations of two goods that
provide the same satisfaction or
total utility to a consumer

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Our analysis concludes that the
slope of the indifference curve is
negative and equal to the marginal
rate of substitution (MRS), which
declines as one moves downward
along the curve

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Consumer equilibrium occurs
where the budget line is
tangent to the highest
attainable indifference curve.
At this unique point, MRS =
slope (price ratio of Px/Py)

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END
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