An indifference curve represents different combinations of two goods that provide same level of satisfaction or utility. Furthermore, it means along the indifference curve utility remains constant.
- All the commodities we consider are economic goods.
- Transitivity – if the consumer is indifferent between X and Y and consumer is indifferent between Y and Z therefore he must be indifferent between X and Z.
- Monotonicity – it means that the consumer prefers more. It also means that more is better which implies that marginal utility is positive.
Properties of indifference curve
- Indifference curve is strictly convex to the origin– this means that the indifference curve is in the shape of a half semicircle with its centre away from the origin. This is because –
- There is diminishing marginal rate of transformation– where marginal rate of transformation is the amount of good Y that the consumer is willing to give up in order to consume an additional unit of good X so the utility remains the same.
- Indifference curve is strictly convex to origin because of averages are preferred over extreme.
- Indiffrence curve is negatively sloped – due to assumption of monotonicity which means more is preferred.
- 2 indifference curves cannot intersect– due to the assumption of transitivity.
- higher indifference curve represents higher utility due to assumption of monotonicity.
Different shapes of indifference curves
- Imperfect substitutes – they are the goods which cannot be used in the place of each other. The shape is convex to the origin.
- Perfect substitutes – 2 goods are perfect substitutes if consumer is ready to exchange one for the other at a constant rate. It means marginal rate of transformation will be constant and therefore indifference curve will be a straight line.
- Perfect compliments – both goods are always used together in a fixed proportion. For example – left shoe and right shoe. It will have a L shaped indifference curve.