Answer to Question #255865 in Management for abc

Question

What is Indifference Curve, explain with the help of diagram and also explain its properties.

Answer 1

Discussion

Indifference curves are graphs that represent various combinations of two commodities which an individual considers equally valuable. The axes of those graphs represent one commodity each (e.g., good X and good Y). Indifference curves are widely used in microeconomics to analyze consumer preferences, the effects of subsidies and taxes, and a few other concepts. Below is an example of indifference curve;

Below are some properties of an indifference curve;

• Indifference curves are downward sloping

Virtually all indifference curves have a negative slope meaning they slope downward from left to right. The slope of the curve shows the rate of substitution between two goods, i.e. the rate at which an individual is willing to give up some quantity of good X to get more of good Y. If for instance an individual likes both goods, the quantity of good Y has to increase as the quantity of good X decreases, to keep the overall level of satisfaction the same. Because both axes each represent one of the two goods, this relationship results in a downward sloping curve.

• Higher indifference curves are preferred to lower ones

Consumers will always prefer a higher indifference curve to a lower one. This is due to the basic economic assumption that is always better. Consumers have a preference for larger quantities. The higher the indifference curves are, the larger the quantities of both goods. And thus, the more preferable the curve becomes.

• Indifference curves cannot intersect

Indifference curves operate under many assumptions, no two indifference curves ever intersect. Consumers are always assumed to be more satisfied when achieving bundles of goods on indifference curves that are farther from the origin. As income increases, an individual will typically shift their consumption level because they can afford more commodities, with the result that they will end up on an indifference curve that is farther from the origin hence better off.

• Indifference Curves are convex (bowed inward)

In most cases, indifference curves are bowed inward. This has to do with the marginal rate of substitution. The marginal utility of consuming a good decreases as its supply increases. Therefore, consumers are willing to give up more of this good to get another good of which they have little. In other words, if they have a lot of good Y, they are more willing to trade some of it in to get an additional unit of good X and vice versa. Because of this relationship, the indifference curve is convex.

Reference

Lawson, S. R., & Manning, R. E. (2001). Solitude versus access: A study of tradeoffs in outdoor recreation using indifference curve analysis. Leisure Sciences, 23(3), 179-191.