Consumer preferences might change between two points in time, rendering specific indifference curves practically useless. Other critics note that it’s theoretically possible to have concave indifference curves or even circular curves that are either convex or concave to the origin at various points. An individual will typically shift their consumption level as their income increases because they can afford more commodities. They’ll end up on an indifference curve that’s farther from the origin as a result and hence better off. 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 they’re achieving bundles of goods on indifference curves that are farther from the origin.
- If the marginal rate of substitution had remained constant, the Indifference Curve would have been a diagonal straight line at 45° angle.
- The Laws of Consumer Demand can be deduced from these preferences.
- To understand why this is the case, we can look at what would happen if they did intersect.
- Let I be a continuous line joining the small circles and other similar points.
- Thus an indifference curve may be defined as a curve which shows combinations of goods which are equivalent to one another.
Proving the Properties of Indifference Curves
This is so because indifference curves are assumed to be negatively sloping and convex to the origin. Indifference curves can neither touch nor intersect each other so that one indifference curve passes through only one point on an indifference map. What absurdity follows from such a situation can be shown with the help of Figure 5 (A) where the two curves 11 and I2 cut each other.
A higher indifference curves to the right of another represents a higher level of satisfaction and preferable combination of the two goods. In Figure 3, consider the indifference curves f and I2 and combinations N and A respectively on them. One of the properties of the indifference curve is that it is strictly convex and never concave. When the consumer repeatedly substitutes or consumes one good over another, the marginal rate of substitution diminishes. A higher indifference curve shows a higher level of satisfaction.
To prove that no two indifference curves can intersect, we can use the concept of transitive preferences. If two indifference curves intersected, then there would be a combination of goods that provides the same level of utility as two different combinations of goods. However, this would contradict the assumption of transitive preferences, as the consumer would be indifferent between two different combinations of goods at the same time. To prove that indifference curves are downward sloping, we can use the concept of marginal rate of substitution (MRS).
If to compensate himself for this loss of utility, he increases the consumption of Y, he may be again on the dotted portion of the curve (vertically from point S). Thus the consumer may be on the concave portion of the circular curve. Since by moving to the dotted portion he gets negative utility, the effective region of the circular curve will be the convex portion. But as a matter of principle, their ‘effective region’ in the form of segments is shown in Figure 9.
Four Properties of Indifference Curves
Consumers will always prefer a higher indifference curve to a lower one. This is due to the basic economic assumption that “more is always better“. Think about it if someone were to ask you if you wanted a free slice of pizza or an entire pizza for free, what would you say? Now, of course, it’s not always that simple, but in basic economic theory, we can assume that consumers have a preference for larger quantities.
The following points highlight the top six properties of indifference curve. If the price of one of the purchasable commodities falls there is a change in the slope of the budget line. But a consumer can compare two or more combinations of goods and say which of them he likes best or whether he likes them all equally well. The Laws of Consumer Demand can be deduced from these preferences. Figure 7(C) shows an indifference curve convex to the origin. Point A on the I2 curve indicates a higher level of satisfaction than point В on the 12 curve, as it lies farther away from the origin.
It comprises individual choices, marginal utility theory, the subjective theory of value, substitution effects, income, ordinal utility, etc. Marginal rates of substitution and opportunity costs play a crucial role in the curve analysis. While each axis denotes a different form of consumer goods, the curve features unique combinations or consumption bundles for any two commodities in points. These combinations provide the same level of satisfaction and utility to the consumer. Since the consumer gets an equal preference for all bundles of goods, they are indifferent about any two combinations on the curve. In other words, a consumer is considered indifferent between any two bundles indicated by a point on the curve, provided these combinations give the same utility.
What are Indifference Curves?
The consumer does not have sufficient funds to purchase all combinations of the two goods. The limits imposed by the budget are shown through the consumer’s budget line. A budget line incorporates information on both the limited income of the consumer to spend and the prices of two purchasable goods. This can be proved by showing that if two indifference curves on the same indifference map intersect, there is logical contradiction (or inconsistency). Suppose I1, and I2 intersect as in Fig 4.8, then from I1.
The Principle of Diminishing Marginal Utility
But point С which lies on both the curves yields the same level of satisfaction as point A and B. If a consumer purchases two goods, the budget limitation can be displayed with the help of a budget line on a graph. A budget line reveals all the possibilities in combinations of two goods a consumer can purchase with limited income. It allows the consumer to buy within a given budget, i.e., within their current income. In the case of any consumer, the utility refers to gain from the consumption of two commodities. In the curve, the quantity consumed by B2 will compensate for the increase in the amount consumed by B2.
When it occurs, it is known as the marginal rate of substitution (MRS). It shows the consumer’s preference for one good over another only if it is equally satisfying. Indifference curves are a graphical representation of the different combinations of two goods that provide the same level of satisfaction or utility to a consumer. They are typically represented on a graph with one good on the x-axis and the other good on the y-axis. Each point on the curve represents a different combination of the two goods that provides the same level of utility to the consumer.
If he increases his consumption of X so as to reach the dotted portion of the I3 curve (horizontally from point S), he gets negative utility. Indifference curves are not necessarily parallel to each other. Though they are falling, negatively inclined to the right, what are the properties of indifference curve yet the rate of fall will not be the same for all indifference curves.
Properties of Indifference Curves
This has to do with the marginal rate of substitution (MRS). We know that the marginal utility of consuming a good decreases as its supply increases (see also diminishing marginal utility). Therefore consumers are willing to give up more of this good to get another good of which they have little.
