What Is an Indifference Curve?
An indifference curve, with respect to two commodities, is a graph showing those combinations of the two commodities that leave the consumer equally well off or equally satisfied—hence indifferent—in having any combination on the curve.
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.
- An indifference curve shows a combination of two goods that give a consumer equal satisfaction and utility thereby making the consumer indifferent.
- Along the curve the consumer has an equal preference for the combinations of goods shown—i.e. is indifferent about any combination of goods on the curve.
- Typically, indifference curves are shown convex to the origin, and no two indifference curves ever intersect.
Understanding an Indifference Curve
Standard indifference curve analysis operates on a simple two-dimensional graph. Each axis represents one type of economic good. Along the curve or the line, the consumer has no preference for either combination of goods because both goods provide 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.
Indifference Curve Analysis
Indifference curves operate under many assumptions, for example, typically each indifference curve is 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. All other economic variables and possible complications are treated as stable or ignored unless placed on the indifference graph.
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 slope of the indifference curve is known as the 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. One noteworthy criticism is that indifference is conceptually incompatible with economic action, and every action necessarily demonstrates preference, not indifference. Otherwise, no action would take place.
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. Consumer preferences might also change between two different points in time rendering specific indifference curves practically useless.