Indifference Curve
What is Indifference Curve?
An indifference curve shows all combinations of two goods that give a consumer the same total satisfaction (utility).
Consumers are indifferent among points on the same curve. Curves farther from the origin represent higher utility. They slope downward and are bowed inward (convex) because of the diminishing marginal rate of substitution; the optimal bundle is where the budget line is tangent to the highest reachable curve.
Indifference Curve: a worked example
One indifference curve for burritos and smoothies passes through the bundles (2 burritos, 8 smoothies), (3, 5), (4, 3) and (6, 2), all of which give equal utility. Going from (2, 8) to (3, 5) gives up 3 smoothies for 1 burrito, a trade rate of 3. From (3, 5) to (4, 3) the rate is 2, and from (4, 3) to (6, 2) it is 0.5. That falling rate is what bows the curve toward the origin. Now price burritos at $5 and smoothies at $2, so the market trades 2.5 smoothies per burrito. Bundle (2, 8) costs $26, bundle (3, 5) costs $25, and bundle (4, 3) costs $26. The cheapest way onto this curve is (3, 5), the bundle where the trade rate crosses from above 2.5 to below it. Hand the consumer $25 and (3, 5) is the optimum.
The mistake students make with indifference curve
A frequent slip is picking the bundle where an indifference curve crosses the budget line instead of the bundle where it just touches. Crossing looks acceptable, because the bundle sits on a curve and is affordable. But if a curve crosses the budget line, part of that curve lies strictly inside the budget set, so the consumer can slide along the line onto a higher curve and gain. Only tangency leaves no such gain available. A second slip is choosing a bundle on the highest curve drawn on the page when that curve sits entirely outside the budget line. Preferred and attainable are different tests.
Indifference Curve questions
Why can't two indifference curves cross?
Crossing would put one bundle on two curves at once. Take the crossing point, a bundle A on the first curve, and a bundle B on the second that holds more of both goods than A. Sharing a curve makes the consumer indifferent between the crossing point and A, and also between the crossing point and B, so A and B would have to be equally good. Yet B holds more of everything, so B is strictly preferred. The contradiction rules out crossing.
What does it mean when an indifference curve is farther from the origin?
A curve farther from the origin represents a higher level of utility, because every bundle on it holds more of at least one good and no less of the other than some bundle on the inner curve. Consumers want to reach the highest curve their budget allows. Moving outward is not a change in preferences, since the whole map of curves exists at once and income and prices decide which one is reachable.
What do indifference curves look like for perfect substitutes and perfect complements?
Perfect substitutes give straight line indifference curves, because the consumer trades the two goods at one fixed rate no matter which bundle she starts from, for example two small coffees for one large at every point. Perfect complements give L shaped curves with the corner sitting on the ray where the goods are used in fixed proportion, since a left shoe added to a pile with no right shoes leaves utility untouched. The familiar bowed curve is the case between those two extremes.
Related terms
Common comparisons
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