What is an Indifference Curve?
An indifference curve is a graphical representation of a combination of two goods that offers the consumer equal satisfaction on consumption, thereby making the consumer indifferent. The consumer derives the same utility along the curve, for any combination. The concept of indifference curve was developed by British Economist Francis Y Edgeworth. It is a tool of microeconomics to demonstrate consumer preferences and the limitations of budget. Indifference curve analysis assumes that all other variables are constant and stable. The slope of the indifference curve is known are the marginal rate of substitution. The marginal rate of substitution is the rate at which the consumer is willing to give up one good for another.
What are the Characteristics of an Indifference Curve?
The indifference curve slopes downward to the right indicating that when the amount of one commodity is increased, the amount of the other commodity in the combination is reduced. Indifference curves are convex to the origin i.e. point of intersection of the X and Y axis. Every indifference to the right of the preceding curve represents a higher level of satisfaction. Indifference curves cannot intersect each other, as the higher and the lower curves represent two different levels of satisfaction altogether. Indifference curves do not touch either the X or the Y axis. The only exception to this rule, is that one is considering a combination of money and commodity.
Use of the Indifference Curve
- It is a handy microeconomics tool that has freed the theory of consumption from the Marshallian utility analysis. It has helped explain the concept of consumer surplus, demand curve and consumer equilibrium.
- The indifference curve has been used to dissect the producer’s equilibrium and the problems of exchange, taxation, rationing, etc.
- Criticisms Regarding Indifference Curve
- Indifference curve is said to make unrealistic assumptions about human behaviour.
- It is unable to explain risky choices undertaken by the consumer.
- It has been criticized for being an ‘old wine in a new bottle’ for it has merely rehashed the concept of diminishing marginal utility of a product in new terms.
- It is based on unrealistic expectations of rationality, perfect competition, divisibility of goods and perfect knowledge of scale or preference, completely negating the imperfections in the decision making process of the consumer.
- It has been argued by some economists that a consumer is indifferent to close alternative combinations as he or she is not able to recognize and appreciate the difference between the two. But as the difference between the goods in the combination increase, the difference becomes more apparent and the same indifference curve will not yield satisfaction to the consumer.
