Indifference Curve Definition and Meaning

Meaning of indifference curve & definition

The indifference curve indicates the various combinations of two goods which yield equal satisfaction to the consumer. By definition:

  • “An indifference curve shows all the various combinations of two goods that give an equal amount of satisfaction to a consumer”.
  • An indifference curve is the locus of all commodity bundles (combinations) that give the consumer the same level of utility (ie, the consumer is indifferent between these bundles.)

Indifference Schedule

Example One

Suppose that each of the bundles A, B, C, and D as defined in the following table will give Mary 100 units of satisfaction in other words, Mary is indifferent among them then the graph of quantity of chocolate against quantity of peanut butter is called an indifference curve

It merely indicates a set of consumption bundles that the consumer views as being equally satisfactory.

Every point on indifference curve represents a different combination of the two goods and the consumer is indifferent between any two points on the indifference curve. All the combinations are equally desirable to the consumer. The consumer is indifferent as to which combination he receives. The Indifference Curve IC thus is a locus of different combinations of two goods which yield the same level of satisfaction.

An Indifference Map:

A graph showing a whole set of indifference curves is called an indifference map. An indifference map, in other words, is comprised of a set of indifference curves. Each successive curve further from the original curve indicates a higher level of total satisfaction.

Assumptions

The ordinal utility theory or the indifference curve analysis is based on following main assumptions:

  1. Rational behavior of the consumer: It is assumed that individuals are rational in making decisions from their expenditures on consumer goods.
  2. Utility is ordinal: Utility cannot be measured cardinally. It can be, however, expressed ordinally. In other words, the consumer can rank the basket of goods according to the satisfaction or utility of each basket.
  3. Diminishing marginal rate of substitution: In the indifference curve analysis, the principle of diminishing marginal rate of substitution is assumed.
  4. Consistency in choice: The consumer, it is assumed, is consistent in his behavior during a period of time. For insistence, if the consumer prefers combinations of A of good to the combinations B of goods, he then remains consistent in his choice. His preference, during another period of time does not change. Symbolically, it can be expressed as:

If A > B in one period, then B > A cannot be possible in another period

  1. Consumer’s preference not self contradictory (Transitivity of choice): The consumer’s preferences are not self contradictory. It means that if combinations A is preferred over combination B is preferred over C, then combination A is preferred over combination A is preferred over C. Symbolically it can be expressed:

If A > B and B > C, then A > C

  1. Goods consumed are substitutable: The goods consumed by the consumer are substitutable. The utility can be maintained at the same level by consuming more of some goods and less of the other. There are many combinations of the two commodities which are equally preferred by a consumer and he is indifferent as to which of the two he receives.
  2. Non-satiety: It implies that consumer has not reached the point of saturation in the consumption of any good. Thus, he tries to move to higher IC to get higher satisfaction.
  3. Independent Scale of Preference: It means if the income of the consumer changes or prices of goods fall or rise in the market, these changes will have no effect on the scale of preference of the consumer. It is further assumed that scale of preference of a consumer is not influenced by the scale of preference of another consumer.

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By Hassham

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