INDIFFERENCE CURVE

ANALYSIS PROJECT BY
1. ISHAAN GUPTA
2. TANISH SINGH
3. PREETIKA SINGH
4. SAMUJWAL SHRESHTHA
5. MEHR SEBASTIAN
6. AYUSH RAJ
 INDEX
S.NO TOPIC SLIDES

1. INDIFFERENCE CURVE 3 AND 4

2. INDIFFERENCE CURVE ANALYSIS 5

3. INDIFFERENCE MAP 6

4. PROPERTIES OF IC 7,8 AND 9

5. ASSUMPTIONS AND CRITICISMS 10 ,11

OF IC
6. MRS AND EXAMPLE OF CHOICE 12,13 AND 14
OF GOODS
7. THANK YOU AND WORK DONE 15,16
BY EACH
 INDIFFERENCE CURVE
• According to Prof J R Hicks utility cannot be measured in cardinal
terms, but we can give preference by ranking
• Consumer has a scale of preference and the utilities can be compared
as being greater or less or equal
• The consumer formulates his scale of preferences independently of
market prices keeping in view the list of commodities of two
commodities gives him greater, smaller or equal satisfaction as
compared with another combination, based on his scale of preferences.
• An indifference curve represent same level of satisfaction of the
consumer from two commodities.
• IC is graphical representation of various alternative combinations of
bundle of 2 goods among which the consumer is indifferent .
► An indifference curve is a line showing all the combinations of two goods
which give a consumer equal utility. In other words, the consumer would be
indifferent to these different combinations.

► Consumer knows what substitution of Good X for Y or Good Y for X will leave
him with same or equal satisfaction

► Indifference schedule: It is a tabular statement showing different combination

of two goods which represent equal satisfaction to the consumer.

► Indifference map: is family of indifference curves.

► Marginal rate of substitution (MRS) tells us how much of one commodity

is substituted for how much of another while obtaining the same.
 INDIFFERENCE CURVE
ANALYSIS
Indifference curves are based on a number of assumptions, such as that each indifference
curve is convex to the origin and that no two indifference curves ever overlap.
When obtaining bundles of commodities on indifference curves that are farther from the
origin, consumers are supposed to be more satisfied.
The majority of the time, indifference curve analysis assumes that all other variables are
stable or constant.
The slope of the indifference curve is referred to by the MRS. The MRS measures how
eager a consumer is to trade one product for another. If a customer values a banana, for
example, the rate of substitution for watermelon will be slower, and the slope will reflect
this rate of substitution.
 INDIFFERENCE MAP
An Indifference Map is a set of Indifference Curves. It depicts the complete picture of a
consumer’s preferences. The following diagram shows an indifference map consisting of
three curves:
We know that a consumer is indifferent among the combinations lying on the same
indifference curve. However, it is important to note that he prefers the combinations on the
higher indifference curves to those on the lower ones.

This is because a higher indifference curve implies a higher level of satisfaction. Therefore,
all combinations on IC1 offer the same satisfaction, but all combinations on IC2 give greater
satisfaction than those on IC1.
 PROPERTIES OF
► Property 1: IC
An IC slopes downward from left to right (negatively sloped)
IC is downward slopping from left to right. This implies that the
consumption of one commodity (Y) has to be decreased to increase the
consumption of the other commodity (X) if the consumer wants to remain
at the same level of satisfaction. In other words consumption of two
commodities are inversely proportionate.
Property 2:
Indifference curves are convex to the origin
The IC is always convex to the origin due to the diminishing marginal rate of
substitution. This implies that as he gets more and more of X he is ready to

Slope of IC is MRS

Diminishing MRS states when a consumer substitutes one

commodity(X) for another(Y) the MRS decreases as the stock
Property 3: of X increases and that of Y decreases

Indifference curves do not intersect each other:

Two IC can neither intersect nor touch to one another. If they did, the point of intersection
would imply two different levels of satisfaction which is impossible

Suppose two ICs intersect each other at point A A=C (lies on the

same IC2)
A=B (also lies on the same IC1)

It Must be B=C (because of transitivity assumption)

But it is impossible because point C gives higher level of satisfaction than
point B as it lies on higher IC below point of intersection.
 Property 4:
Higher IC represents higher level of satisfaction
An IC that lies farther from the origin provides higher level of satisfaction. It is because
the higher IC consists of the more amount of both goods or because of monotonic
preference.
IC2> IC1

Property 5
IC never touches either or both axes
An IC can’t touch either of the two axes. If it touches any of the axis, it means
the consumer is consuming only one good and none of other. This is against its
assumption of consumer consumes combination of two goods
 ASSUMPTIONS OF IC CURVE

Consumer ‘s money income is given and it is fixed

► Consumer spend his income on those goods which can be substituted for each other, like tea and
coffee

► Consumer’s preference for the two goods is well defined

► More of a good always gives more satisfaction to consumer (called “monotonic preference” for
goods).This means TU is maximum.

► Consumer is rational. He always try to maximize his satisfaction

 CRITICISMS AND COMPLICATIONS
OF IC

 Many components of current economics, like indifference curves, have been criticised for
oversimplifying or making unreasonable assumptions about human behaviour. Consumer
tastes, for example, might change dramatically over time, rendering accurate indifference
curves useless.

Others argue that concave indifference curves, as well as circular curves that are convex or
concave to the origin at specific points, are theoretically possible. Consumer preferences
can change substantially over time, making accurate indifference curves obsolete.
 PRINCIPLE OF MARGINAL
RATE OF SUBSTITUTION
• Marginal rate of substitution (MRS) is based on an important economic
principle, i.e. MRS of X for Y diminishes more and more with each successive
substitution of X for Y. This principle is known as diminishing marginal rate of
substitution.
• According to MRS, a consumer can let go off some of one commodity, say Y,
in order to gain more of the other commodity X. However, as the consumer
starts getting more and more of commodity X, he tends to forego less and
less of good Y.
• The rate at which the consumer substitutes X for Y is greater at the
beginning. But, as he continues the substitution process, the rate of
substitution begins to fall.
EXAMPLE OF CHOICE OF GOODS WHICH
GIVE CONSUMER SAME UTILITY
► Slope of IC = MRSXxy = ∆Y/∆X

COMMODITY GOOD X GOOD Y MRS =∆Y/∆X

P 1 20 ----

Q 2 15 5
(5Y:1X)
R 3 11 4
(4Y:1X)
S 4 8 3
(3Y:1X)
T 5 6 2
(2Y:1X)
THANK YOU
 WORK DONE BY EACH
• 1 TITLE – ISHAAN
• 2 INDEX – SAMUJWAL
• 3 ,4 MEANING OF IC – AYUSH RAJ
• 5 MEANING IC ANALYSIS – PREETIKA SINGH
• 6 MEANING IC MAP – PREETIKA SINGH
• 7,8 PROPERTIES OF IC – TANISH SINGH
• 9,10- PROPERIES OF IC AND ASSUMPTIONS – MEHR SEBASTIAN
• 11 CRITICISMS OF IC ANALYSIS – SAMUJWAL
• 11,12,13 MRS AND EG OF IC CURVE – ISHAAN
• 14 WORK DONE BY EACH – ISHAAN
• 15 THANK U – SAMUJWAL
• PICS BY ISHAAN