What is the indifference curve analysis?
Another important topic in economics after the budget line is the indifference curve analysis. The word ‘Indifference’ means being ‘neutral’ or having no effects at all. An indifference curve is a curve that shows the combinations of two commodities that give the same level of satisfaction to the consumer. Each point on the indifference curve represents the same level of satisfaction. The general shape or the most common shape of the indifference curve is convex to the origin. As shown below, ‘AB’ is an indifference curve. To draw the indifference curve; on the x-axis, we represent the quantity of good X, and on the y-axis, we represent the quantity of good Y, because the indifference curve is a combination of two-goods. Point a,b and c shows that consumer is indifferent or neutral at these points as each of these points provide the consumer same level of satisfaction. Hence, a=b=c.
Properties of Indifference curve analysis
- Slopes downward to the right.
- Convex to the origin.
- Higher indifference curves are preferred to the lower indifference curve.
- Indifference curves do not cut or intersect each other.
- The indifference curve never touches the x-axis or y-axis.
Now, one by one, I will explain the reason behind each property of the indifference curve.
Why Indifference curve is downward sloping or negatively sloped?
The indifference curve is downward and negatively sloped because if the consumer wants to have more units of one good. He will have to reduce the consumption of other goods to maintain the same level of satisfaction. As shown below, to increase the consumption of good X by 1 unit, a consumer needs to sacrifice consumption of good Y. Similarly, if a consumer wants to reach point ‘c’ on the indifference curve. The consumer will be increasing the consumption of good X by 1 unit and reduce the consumption of good Y by 3 units.
Why the indifference curve is convex to the origin?
An indifference curve is convex to the origin because of the diminishing marginal rate of substitution. The marginal rate of substitution (MRS) is the name of the slope of the indifference curve. As shown below, to gain an additional unit of good X, the consumer is willing to give up fewer and fewer units of good Y. To move from point A to B, the consumer sacrifices 4 units of good Y and gains 1 unit of good X. Similarly, to move from point B to C, he sacrifices 3 units of good Y and gets 1 extra unit of good X. Therefore, MRS is diminishing.
Why higher indifference curves are preferred to the lower indifference curves?
To understand this, first, we will learn the meaning of the indifference map. The set or collection of more then 1 indifference curve is known as the indifference map. A higher indifference curve shows a higher level of satisfaction. As shown below, a rational consumer will always prefer to operate on a higher indifference curve, that is, at IC4. This indifference curve shows a higher level of consumption as compared to IC1.
Why do indifference curves cannot intersect each other?
Indifference curves do not cut each other because the result will be a paradox (Contradictory). Let’s assume two indifference curves that are intersecting with each other. We have IC1 and IC2. on IC1, there are two points A and B. IC2, we have C and B. We know that points on the same indifference curve show the same level of satisfaction.
On IC1, we have A=B (Because each point on the indifference curve reflects the same level of satisfaction)
Similarly, On IC2, we have B=C
Therefore, C = A (Because A= B & B = C)
But point A, is on a higher indifference curve reflecting higher satisfaction. Hence, Indifference curves will never intersect with each other.
Indifference curve never touches any axis.
IC analysis is based on ranking or preferences. It is assumed that we should consume two goods to satisfy ordinal utility (A utility that gives ranking to the preferences of the consumer). But, if the indifference curve touches the x-axis or y-axis, it will be against the assumption of two commodity consumption. As shown below on IC1 consumer is consuming only good Y and zero units of good X because IC1 is touching the Y-axis on point B. Similarly, on IC2 consumer is consuming good X and zero units of good Y. But according to indifference curve analysis, a consumer needs to consume a combination of two goods. Hence, the indifference curve will never touch the x-axis or y-axis.