Indifference Curve - Explained
What is the Indifference Curve?
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What is the Indifference Curve?
In economics, an indifference curve is a curve that shows the combination of two goods that give a consumer equivalent satisfaction and utility. This curve indicates that a consumer is indifferent about the two products since he derives equal satisfaction from both. An indifference curve represents a locus of points sharing between two different goods that give a consumer the same level of utility. An indifference curve is often used to showcase a consumers preference limitation when two goods of equivalence utility are considered, this means the consumer has no preference for any of the products. Here are the major points of an indifference curve;
- An indifference curve is a graph that shows the combination of two goods for which a consumer is different.
- When two goods or products with different qualities give a consumer the same level of satisfaction and utility, an indifference curve is realized.
- In an indifference curve, a consumer has no preference for either of the combination of goods.
- Two indifference curves do not intersect on the indifference curve graph. In recent times, economists have begun to apply the indifference curve in welfare economics.
How is the Indifference Curve Created?
The indifference curve is plotted on a standard graph with two dimensions or axis; the y and the x-axis. Each point, dimension or axis on the graph represents one type of good. On the graph, the indifference curve explains how a consumer shows no preference for either of the two commodities since he derives the same utility from them. This curve shows how a consumer is indifferent about two different goods that give the same level of satisfaction. It is important to know that two indifferent curves can never intersect, they do not cross. Indifference curves do not cross each other, and they never intersect. The core principles of the indifference curve are highlighted below;
- An indifference curve analysis incorporates many other economic theories such as marginal utility theory, individual choice or preference theory, income theory, and the substitution effect.
- Usually, consumer derives satisfaction with goods when they are pitched on higher indifference curves.
- The higher the income of a consumer, the higher the indifference curves. Every indifference curve is convex to its origin, in this vein, two indifference curves can intersect.
- The opportunity cost and marginal rates of substitution (MRS) are crucial to the indifference curve analysis. MRS refers to the slope of the indifference curve, it shows the willingness of a consumer to give up one good for another.
Criticisms and Complications
The major criticism of the indifference curves is that it makes unrealistic assumptions about human consumption patterns, preference and satisfaction level. Another criticism of the indifference curve is that it does not align with economic activity, in the sense that the only action in the indifference curve is that of preference and not indifference. The indifference curve fails to account for changes in consumer preferences that might occur due to changes in needs or even changes in income. And once this happens, there is a change between the two points of the curve, making the curve ineffective.
- Total Utility (Economics)
- Efficiency Principle
- Indifference Curve
- Time Preference Theory of Interest
- Diminishing Marginal Utility
- Sunk Costs
- Production Possibilities Frontier
- Law of Diminishing Returns
- Economic Efficiency
- Efficiency Theory
- Productive Efficiency
- Capacity Utilization Rate
- Pareto Efficient
- Comparative Advantage
- Criticisms of the Economic Approach
- Behavioral Economics
- Normative Economics
- Positive Economics
- Invisible Hand
- Sunk cost