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Wize University Microeconomics Textbook > Theory of Consumer Choice

Indifference Curves

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Indifference Curves

An indifference curve is a curve that shows us all the combinations of two products that give us the same utility (happiness/satisfaction).



Marginal Rate of Substitution

  • The slope of the indifference curve is called the Marginal Rate of Substitution (MRS).
  • It shows us how many units of the good on the Y axis you are willing to give up for one more unit of the good on the X axis (with the same level of utility).
  • In the diagram above as we go from point A to B, to get one extra unit of food we are willing to give up
    4
    units of clothing. So the MRS is -4.
  • As we go from B to C, to get one extra unit of food we are willing to give up
    2
    units of clothing. So the MRS is -2.
  • As we go from point C to D, to get one extra unit of food we are willing to give up
    1
    unit of clothing. So the MRS is -1.
  • As we get more units of X, the MRS will
    decrease
    in absolute value.

 Marginal Rate of Substitution (MRS)=−MUxMUy\boxed{\text\ Marginal\ Rate\ of\ Substitution\ \left(MRS\right)=-\frac{MUx}{MUy}}

Where:
MUx = Marginal Utility of good X
MUy = Marginal Utility of good Y
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4 Properties of Indifference Curves:

  1. Higher indifference curves mean higher levels of utility
  2. Indifference curves are always negatively sloped
  3. Indifference curves are convex (bowed inward toward the origin)
  4. Indifference curves can never intersect because this means our preferences would not be transitive (logical). Example: If you like KitKat more than Twix and Twix more than Mars, then you should like KitKat more than Mars.

  • In the diagram above, point A and B are on the same indifference curve so they give the same utility.
  • Point C and D are on the same indifference curve so they give the same utility.
  • Point B has the same amount of X as point D but with
    more
    Ys so point B is
    better
    than D.
  • If B is better than D then A should be better than C (because B is the same as A and D is the same as C).
  • At point C we have the same amount of Ys as point A but with
    more
    Xs so point C is
    better
    than A.
  • This violates the assumption of transitivity (logical order).










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Example: Indifference Curves

Which of the following is correct about an indifference curve?
A) as the consumer consumes more of one good and less of the other good along an indifference curve, the overall level of utility falls
B) the midpoint of an indifference curve yields a higher utility level than those points closer to the horizontal or vertical axis
C) indifference curves further from the origin correspond to higher levels of total utility
D) all of the answers are correct

C
All the points on the same indifference curve mean the same level of utility. But higher indifference curves (further from the origin) mean a higher level of utility