Indifference Curve

Instructor: Changez Khan

Basic Concepts for the Consumer Theory
Bundle = Combination of goods (that are being
consumed)
 X And Y
If a consumer gets the same amount of utility from
bundle A as from bundle B, she is indifferent between A
and B

Indifference curve is a set of all bundles that yield the

same utility

Slope of the indifference curve = marginal rate of

substitution (MRS) = the increase of one good needed
to compensate the loss of another good
 Indifference Curve (Two goods)

Good Y

20

12 Higher utility
Apple

4 IC2
IC1

3 10 20
Good X
Mangos
 Characteristics of Indifference Curves
INDIFFERENCE CURVE ALWAYS SLOPES DOWNWARDS FROM LEFT TO RIGHT

An indifference curve has a negative slope, i.e. it slopes downward from left
to right.
Reason: If a consumer decides to have one more unit of a commodity
(say apples), quantity of another good (say oranges) must fall so that the total
satisfaction (utility) remains same.
 INDIFFERENCE CURVE IS ALWAYS CONVEX TO THE ORIGIN

IC is strictly Convex to origin i.e. MRS xy is always diminishing

Reason: Due to the law of diminishing marginal utility a consumer is

always willing to sacrifice lesser units of a commodity for every
additional unit of another good.
 (c) Higher Indifference Curve Represents Higher Level Of
Satisfaction

 Higher indifference curve represents larger bundles of goods i.e.

bundles which contain more of both or more of at least one.

 It is assumed that consumer’s preferences are monotonic i.e. he always
prefers larger bundle as it gives him higher satisfaction.
Indifference Curves can neither touch nor Intersect each other
Budget Constraint and the Equilibrium
• Budget 100 rs

• Apple =20
• Mango 10 rs

• Mangos 10
• Apples 5
 The Consumer Equilibrium
Budget Constraint: PX x X+PY x Y= income
 Y=income/PY – PX/PY*X
That is, slope of the budget constraint = –PX/PY
ood Y
Indifference Curve: MUX*X+MUY*Y=initial utility
 Y = (initial utility)/MUY-MUX/MUY*X
That is, slope of the indifference curve = -MUX/MUY

Equilibrium: PX/PY=MUX/MUY=MRS

y*

x*