Indifference Curve

Imagine you were asked to divide your money between clothes and food. How many units of food and how many units of clothes would you choose to buy? Which combinations of food and clothing would give you the same level of satisfaction? Is that even possible? According to the theory behind the indifference curves, that's quite possible! Want to find out how indifference curves work and what they say about your preferences? Keep scrolling!

Indifference Curve Indifference Curve

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Table of contents

    Indifference Curve Definition

    The indifference curve definition refers to the graph which depicts all the possible combinations of market baskets that provide a customer with the same level of satisfaction. A consumer does not prefer a market basket over any other that lies on the same indifference curve. Hence, the consumer is said to be indifferent between choosing one basket or the other.

    The indifference curve is a curve that represents all combinations of market baskets that provide a consumer with the same level of utility.

    It's also important to note that the indifference curve is built on the individual's taste. It is upon the individual's preference and taste to decide which market baskets give them the same utility.

    For example, you might like eating more pizza than spaghetti, drinking more cola than eating salad, or the other way around. If a person can pick between two different bundles, they will do so according to their own tastes.

    If a consumer is satisfied with either of the two bundles, then we say that they are indifferent between the two bundles since both satisfy the customer to the same degree.

    For example, if you don't mind whether you eat spaghetti or pizza for dinner, that means that you're indifferent between eating pizza or spaghetti.

    Indifference curve Indifference curve of a person choosing between food and clothing StudySmarterFig. 1 - Indifference curve of a person choosing between food and clothing

    Figure 1 shows the indifference curve of a person choosing between food and clothing. All the points along the indifference curve represent choices between food units and clothing units the individual makes. It is important to note that the individual is indifferent between all the points along the indifference curve.

    For example, imagine someone is indifferent or has the same level of utility from consuming a bundle at point 1, which includes eight units of clothing and two units of food. This same person would be indifferent between the bundle at point 1 and a bundle at point 2, which includes four units of clothing and seven units of food.

    Indifference Curve Indifference Curve Map StudySmarterFig 2. - Indifference map

    Figure 2 shows the indifference map, which consists of multiple indifference curves.

    The indifference map is a diagram that shows a set of indifference curves containing market baskets to which the individual is indifferent.

    Any market basket which lies on I3 is preferred to any basket that lies on I2 and I1. The higher indifference curves are preferred to lower ones. The consumer receives the same level of utility from any combination of market baskets that belongs to I3, but he will always choose them and prefer them more than the market baskets belonging to I2 and I1.

    Check out our explanation of utility functions for a better understanding of utility!

    The Slope of the Indifference Curve

    The slope of the indifference curve is the marginal rate of substitution.

    The marginal rate of substitution is the rate at which an individual is willing to exchange a good for the additional consumption of another good.

    If you need to refresh your knowledge of the marginal rate of substitution,we have a detailed explanation of it, so don't miss out and click here:

    - Marginal Rate of Substitution.

    In other words, the marginal rate of substitution measures how much of good 1 an individual is willing to give away for the consumption of good 2 along the indifference curve. That means that regardless of the amount of consumption the individual is ready to give away, they remain equally satisfied along the indifference curve.

    Indifference curve Indifference curve of an individual choosing between the two goods StudySmarterFig. 3 - Indifference curve of an individual choosing between the two goods

    Figure 3 shows the indifference curve of an individual that is choosing between Coffee and Pepsi while being equally satisfied at each point on the indifference curve. At point 1, the individual decides to consume ten units of Coffee and one unit of Pepsi. At point 2, the individual is happy to consume two units of Pepsi and five units of Coffee.

    Notice that when the individual moved from point 1 to point 2, they lowered the consumption of Coffee from ten to five and increased the consumption of Pepsi from one to two units. That means they gave away five units of Coffee for an additional unit of Pepsi. This implies that their marginal rate of substitution is equal to five Coffees per Pepsi.

    Indifference curve Marginal Rate of Substitution between Pepsi and Coffee StudySmarterFig. 4 - Marginal rate of substitution between Pepsi and Coffee

    Figure 4 shows the marginal rate of substitution at each point of the indifference curve for an individual choosing between Coffee and Pepsi. Notice that the marginal rate of substitution decreases as the individual increases their consumption of Pepsi. Initially, they gave up five units of Coffee for a Pepsi, then three units of Coffee, and then only one unit of Coffee.

    Think about it. There is a certain amount of Pepsi one can consume and trade-off Coffee for it. You can't keep increasing the amount of Pepsi consumption and lowering the caffeine consumption forever.

    The diminishing marginal rate of substitution is the reason why the indifference curve is convex (bowed inward). Being convex means that an individual will initially give away a higher amount of good 2 to consume an additional amount of good 1. However, at some point, this begins to drop, and the rate at which the consumer replaces one good for the other drops, which makes the indifference curve convex.

    Indifference Curve Properties and Assumptions

    There are four key properties of indifference curves.

    1. Higher indifference curves are preferred to lower ones. Higher indifference curves are preferred to lower ones because at higher indifference curves, there is more consumption taking place, and individuals prefer to consume more than less.
    2. Indifference curves are downward sloping. The rate at which a customer is ready to exchange one item for another may be seen reflected in the slope of an indifference curve. If the amount of one product is decreased, the quantity of the other good must increase for the customer to experience the same level of satisfaction. Hence, it is downward sloping.
    3. Indifference curves do not intersect. Two different indifference curves do not intersect. Imagine that there are two different indifference curves. Normally, one would be higher than the other. Remember that an individual is happy to consume any combination on an indifference curve; however, they will always prefer higher indifference curves to lower ones. When two indifference curves intersect, you have one market basket in common for both. The lower indifference curve has market basket A and market basket B. And on the higher indifference curve are market basket B and market basket C. That means that the consumer is equally satisfied between the consumption of market basket A and market basket C. However, that is not true, as the higher indifference curves are preferred to lower ones, which is why they can't intersect.
    4. Indifference curves are convex. The indifference curves are bowed inward due to the diminishing marginal rate of substitution. In particular, the indifference curves are bent inward because individuals are more eager to give away items they have an excess of and less willing to trade away goods of which they have little.

    The main properties of the indifference curve are based on the basic assumptions of consumer choice theory. These basic assumptions reveal why an individual prefers one market basket over another. The main assumptions of the consumer choice theory are Completeness, Transitivity, and More is better than less.

    • Completeness refers to the preferences of individuals being complete. That means the consumer can rank the market baskets and choose between them.
    • Transitivity. Transitivity means that if an individual chooses market basket one over market basket two, and market basket two is preferred over market basket three, then market basket one is also preferred to market basket three.
    • More is better than less. The market basket with more goods is always preferred to those with fewer goods.

    For a detailed explanation of the consumer choice theory, check out our article!

    Perfect Substitutes Indifference Curve

    The indifference curve of perfect substitutes is linear. This means that the marginal rate of substitution is equal to one. A consumer gives away only one unit of good 2 in exchange for a unit of good 1 at all points along the indifference curve.

    Perfect substitutes refer to products that are identical, and a consumer is, therefore, indifferent between them.

    The shape of an indifference curve reveals the degree to which consumers are prepared to exchange one product for another. The indifference curves are less convex when the commodities may be easily substituted for one another; on the other hand, when it is difficult to replace one commodity for another, the indifference curves are more convex.

    Think about how hard it would be for you to replace the apple juice with peach juice if you consider them to be the same thing.

    Indifference curve Perfect Substitutes Indifference Curve StudySmarterFig. 5 - Perfect substitutes indifference curve

    Figure 5 shows the perfect substitutes indifference curve for an individual choosing between apple juice and peach juice. These two goods are perfect substitutes for the individual as they are utterly indifferent between having a glass of apple juice or peach juice.

    In such a case, the marginal rate of substitution between apple juice and peach juice is equal to 1. This means that an individual will always be willing to give away one glass of peach juice for an additional glass of apple juice while always being happy about it.

    Perfect Complements Indifference Curve

    Perfect complements' indifference curves are right-angled.

    Perfect complements refer to goods that can't be consumed without each other.

    For example, to drive a diesel car, you need gas. If it weren't for gas, you would not have been able to drive. Thus, cars and gas are perfect complements.

    To illustrate the graph of perfect complements indifference curves, think about a left shoe and a right shoe.

    Indifference Curve Perfect Complements Indifference Curve StudySmarterFig. 6 - Perfect complements indifference curve

    Figure 6 shows the indifference curve of an individual who consumes right shoes and left shoes. For the individual, the right shoe and the left shoe are complements because only one shoe will not increase utility unless the shoe is matched with the other shoe.

    In such a case, the marginal rate of substitution of the right shoe is zero when there are more right shoes than left ones. The marginal rate of substitution is infinite when there are more left shoes than right. That's because the individual needs the pairing shoe to achieve any given level of utility in the case of perfect complements.

    If you want to learn the difference between substitutes and complements, check out our article!

    Indifference Curve - Key takeaways

    • The indifference curve is a curve that represents all combinations of market baskets that provide a consumer with the same level of utility.
    • The slope of the indifference curve is the marginal rate of substitution.
    • Perfect substitutes refer to products that are identical, and a consumer is, therefore, indifferent between them.Perfect substitutes have linear indifference curves.
    • Perfect complements refer to goods that can't be consumed without each other.Perfect complements' indifference curves are right-angled.
    Frequently Asked Questions about Indifference Curve

    What are the four properties of an indifference curve?

    The four properties of an indifference curve are as follows:

    1. Higher indifference curves are preferred to lower ones.
    2. Indifference curves are downward sloping.
    3. Indifference curves do not cross. 
    4. Indifference curves are bowed inward.

    What are the types of indifference curve?

    The main type of indifference curve include: convex indifference curves, perfect substitutes indifference curve, and perfect complement indifference curve.

    Why is it called indifference curve?

    Because the individual is indifferent at different points of the indifference curve.

    What is an example of indifference?

    For example, if you don't mind whether to eat spaghetti or pizza for dinner, that means that you're indifferent between eating pizza or spaghetti.

    Why is indifference curve convex?

    The indifference curve is convex because of diminishing marginal rate of substitution.

    Test your knowledge with multiple choice flashcards

    The slope of the indifference curve is the _____________.

    Which one of the following is not a property of the indifference curve?

    Indifference curves are _______.

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