Indifference

Curve Analysis

RICHILLE S. PALAD
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 Outline of the Presentation
What is Indifference Curve??
Properties of Indifference curve.
Consumer Equilibrium.
Income Effect.
Income Consumption curve.
Price Effect.
Price Consumption Curve.
Substitution Effect.
Conclusion.

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 What is Indifference Curve??
An Indifference Curve is defined as the locus of
points each representing a different
combination of two substitute goods, which
yield the same utility or level of satisfaction to
the customer.

An Indifference Curve is also called as Iso-utility

curve and Equal utility curve.

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 Example: Indifference Curve Analysis
A consumer consumes two goods A and B and he
makes five combinations a,b,c,d and e of the
two substitute commodities.

Combinations Units of Commodity Units of Commodity Total

A B Utility
a = 25 3 u
b = 15 5 u
c = 8 9 u
d = 4 17 u
e = 2 30 u

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 Indifference Curves
30 m e r
on su e ,
c m
25 If the ater inco r
g re e r o
15 had e of eith could
Quantity of A

mor oducts .
8 th p r a s e d
b o ur c h
be p
4

0
3 5 9 12 17 30
Quantity of B

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 Properties of indifference curves
Indifference Curves Are Down sloping

An indifference Curve slopes downward

more of one product means less of the other
total utility is to remain unchanged.

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 Indifference Curves can not cross each other

At the point of tangency, the higher curve will give as much as

of the two commodities as is given by
the lower indifference curve.

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Indifference Curves Can not be Thick

It is difficult to draw

It would not be rational.

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 Indifference Curves are convex to the
Origin.

Can never be straight line.

Can never be concave to the origin. because of the

rate of substitution.

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 Higher Indifference Curve Represents Higher Level
of Satisfaction

Each indifference curve has different level of satisfaction.

Higher indifference curve has higher the level of

satisfaction.

Lower indifference curve has lower level of

satisfaction.

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Indifference Curves never intersect the axes

One of the basic assumptions of indifference curves is that

the consumer purchases combinations of different
commodities. He is not supposed to purchase only one
commodity. In that case indifference curve will touch one
axis. This violates the basic assumption of indifference
curves.

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 Consumer Equilibrium
The indifference map in combination with the budget
line allows us to determine the one combination of
goods and services that the consumer most wants
and is able to purchase. This is the consumer
equilibrium.
The consumer maxi-
mizes satisfaction by
purchasing the
combination of
goods that is on the
indifference curve
farthest from the
origin but attainable
given the
consumer’s budget.
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 Income Effect

The Income Effect is defined as the total

change in the quantity consumed of a
commodity due to change in its income.
The increase in demand on account of
an increase in real income is known as
income effect.
The increase in real income encourages
the consumer to demand more goods
and services.

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 Income Consumption Curve
Income Consumption Curve is defined as
a curve that joins different equilibrium
points when the income of the
consumer changes with fixed price.

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 Price Effect

The Price Effect is defined as the

total change in the quantity
consumed of a commodity due
to change in its price.

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 Price Consumption Curve

Price Consumption Curve is a

locus of points of equilibrium
on indifference curves,
resulting from the change in
the price of a commodity.

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 Substitution Effect

Substitution Effect arises due to the

consumer’s inherent tendency to
substitute cheaper goods for the
relatively expensive ones.

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 Conclusion
The indifference curve indicates what
the consumer is willing to buy

The budget line shows what the

consumer is able to buy

When the indifference curve and the

budget line are combined, we find the
quantities of each good the consumer is
both willing and able to buy

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