Indifference Curve

Published Jan 3, 2023

Definition of Indifference Curve

An indifference curve is a graphical representation of a consumer’s preferences for two goods. It shows all the combinations of two goods that yield the same level of satisfaction for the consumer. That means it is a curve that connects all the combinations of two goods that the consumer is indifferent between.

The image below shows an example of an indifference curve between two goods, good A and good B.

Example

To illustrate this, let’s look at an example. Imagine a consumer called John who has to decide between two goods A and B. John has a limited budget and can only afford a certain amount of both goods. Now, let’s assume that John is equally happy if he buys 220 units of good B and 60 units of good A or 60 units of good B and 180 units of good A.

If we plot these combinations as well as all other possible combinations in a diagram, we can connect them through a single line. This line is called an indifference curve. Note that the slope of this indifference curve indicates the marginal rate of substitution, i.e., how much of good A John is willing to give up in order to get more of good B, and vice versa.

As we can see in the illustration above, if John has 220 units of good B, he is willing to give up 30 of those to get 10 more units of good A. By contrast, if he only has 80 units of good B, he demands 40 additional units of good A to give up 20 of them.

Why Indifference Curves Matter

Indifference curves are an important tool for economists to analyze consumer behavior. They help to understand how consumers make decisions and how they allocate their limited resources. Furthermore, they are also used to analyze the effects of changes in income, prices, and other factors on consumer behavior.