Indifference Curves
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 A and good B).
Indifference curves are widely used in microeconomics to analyze consumer preferences, the effects of subsidies and taxes, and a few other concepts.
There are four important properties of indifference curves that describe most of them:
1. Indifference Curves are Downward Sloping
Virtually all indifference curves have a negative slope. That is, they slope downward from left to right. The slope of an indifference 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 A to get more of good B. If we assume that the individual likes both goods, the quantity of good B has to increase as the quantity of good A 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. This becomes pretty obvious if we look at the illustration below.
2. 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 “more is always better“. Just 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? Who says no to free pizza, right? 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. This is reflected in the indifference curves. The higher the indifference curves are, the larger the quantities of both goods. And thus, the more preferable the indifference curve becomes. Check out the illustration below to see this.
3. Indifference Curves Cannot Intersect
It is impossible for two indifference curves to cross. To understand why this is the case, we can look at what would happen if they did intersect. As we know, all combinations of good A and good B that lie on the same indifference curve make the consumer equally happy. Therefore, if two indifference curves were to cross, they would both have to provide the consumer with the same level of satisfaction, because the exact point where they intersect (i.e. point A) is on both curves. Thus, all other combinations on both curves would have to provide the same level of satisfaction as well. However, if we compare point B and point C, we can clearly see that point C offers more of good A and good B (90 and 140) as compared to point B (80 and 130). As we already learned above, consumers always prefer larger quantities. Therefore it is impossible for both curves to provide the same level of satisfaction, which means they can never intersect.
4. Indifference Curves are convex (i.e. bowed inward)
In most cases indifference curves are bowed inward. 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 in order to get another good of which they have little. Let’s look at the graph below to illustrate this. If a consumer has a lot of good B, the MRS is 3 units of good B per unit of good A. If she has more of good A, the MRS is 0.5 units of good B per unit of good A. In other words, if they have a lot of good B, they are more willing to trade some of it in to get an additional unit of good A and vice versa. Because of this relationship, the indifference curve is bowed inward (i.e. convex).
