Indifference Curves in Economics: What Do They Explain?

Indifference Curve

Investopedia / Paige McLaughlin

What Is an Indifference Curve?

An indifference curve is a chart showing various combinations of two goods or commodities that leave the consumer equally well off or equally satisfied—hence indifferent—when it comes to having any combination between the two items that is shown along the curve.

For instance, if you like both hot dogs and hamburgers, you may be indifferent to buying either 20 hot dogs and no hamburgers, 45 hamburgers and no hot dogs, or some combination of the two, e.g., 14 hot dogs and 20 hamburgers (see point 'A' in the chart below). Either combination provides the same utility.

Marginal Rate of Substitution

Image by Julie Bang © Investopedia 2019

Key Takeaways

  • An indifference curve shows a combination of two goods in various quantities that provides equal satisfaction (utility) to an individual.
  • It is used in economics to describe the point where individuals have no particular preference for either one good or another based on their relative quantities.
  • Along the curve, a consumer thus has an equal preference for the various combinations of goods shown.
  • Typically, indifference curves are shown convex to the origin, and no two indifference curves ever intersect.
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Understanding Indifference Curves

Standard indifference curve analysis operates using a simple two-dimensional chart. Each axis represents one type of economic good. Along the indifference curve, the consumer is indifferent between any of the combinations of goods represented by points on the curve because the combination of goods on an indifference curve provides the same level of utility to the consumer.

For example, a young boy might be indifferent between possessing two comic books and one toy truck, or four toy trucks and one comic book, so both of these combinations would be points on an indifference curve of the young boy.

Indifference curves are heuristic devices used in contemporary microeconomics to demonstrate consumer preference and the limitations of a budget. Economists have adopted the principles of indifference curves in the study of welfare economics.

Indifference is conceptually incompatible with real-life economic action. Every action that people take indicates a preference, not indifference. Furthermore, people's relative preferences have been found to change over time and depending on their social context.

Indifference Curve Analysis

Indifference curves operate under many assumptions; for example, 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 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.

Many core principles of microeconomics appear in indifference curve analysis, including individual choice, marginal utility theory, income, substitution effects, and the subjective theory of value. Indifference curve analysis emphasizes marginal rates of substitution (MRS) and opportunity costs. Indifference curve analysis typically assumes all other variables are constant or stable.

Most economic textbooks build upon indifference curves to introduce the optimal choice of goods for any consumer based on that consumer's income. Classic analysis suggests that the optimal consumption bundle takes place at the point where a consumer's indifference curve is tangent with their budget constraint.

The MRS

The slope of the indifference curve is known as the marginal rate of substitution (MRS). The MRS is the rate at which the consumer is willing to give up one good for another. If the consumer values apples, for example, the consumer will be slower to give them up for oranges, and the slope will reflect this rate of substitution.

Criticisms and Complications of the Indifference Curve

Indifference curves, like many aspects of contemporary economics, have been criticized for oversimplifying or making unrealistic assumptions about human behavior. For example, consumer preferences might change between two different points in time, rendering specific indifference curves practically useless. Other critics note that it is theoretically possible to have concave indifference curves or even circular curves that are either convex or concave to the origin at various points.

What Does an Indifference Curve Explain?

An indifference curve is used by economists to explain the tradeoffs that people consider when they confront two goods that they wish to buy. Because people are constrained by a limited budget, they cannot purchase everything. Instead, a cost-benefit analysis must be considered. Indifference curves visually depict this trade-off by showing which quantities of two goods provide the same utility to a consumer (i.e., where they remain indifferent).

What Is the Formula for an Indifference Curve?

 The formula used in economics for constructing an indifference curve is:

𝑈(𝑡, 𝑦)=𝑐


where:

  • c stands for the utility level achieved on the curve and is constant.
  • t & y are the quantities of two different goods, t and y.


Different values of c correspond to different indifference curves, so if we increase our expected utility, we obtain a new indifference curve that is plotted above and to the right of the previous one.

What Are the Properties of Indifference Curves?

Indifference curves assume that individuals have stable and ordered preferences, and seek to maximize their utility. As a result, indifference curves will have these four properties:

  • The indifference curve is downward-sloping.
  • The slope of the indifference curve is convex.
  • Curves plotted higher and further to the right correspond with higher levels of utility.
  • Various indifference curves can never cross or overlap.
Article Sources
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  1. Brigham Young University-Idaho. "Section 01: Consumer Behavior."

  2. Your Article Library. "14 Major Criticisms Regarding Indifference Curve Analysis."

  3. Core Econ. "Indifference Curves and the Marginal Rate of Substitution."

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