Properties of Indifference Curve

AN ASSIGNMENT ON

PROPERTIES OF INDIFFERENCE CURVE

FOR THE PARTIAL FULFILLMENT OF PAPER

MANAGERIAL ECONOMICS
PGDM 2nd SEMESTER

SUBMITTED TO:-

MR. MEHUL CHAUHAN

ASSISTANT PROFESSOR
XIDAS, JABALPUR

SUBMITTED BY:-

MADHAVESH KUMAR
ROLL NO. – 37
EMAIL ID- kumarmadhavesh@gmail.com

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 Properties of Indifference Curve

Introduction: - Indifference curve analysis is one of the important theories of managerial

economics. It is a geometrical device developed by J.R.Hicks and R.G.D. Allen in an article “a
reconsideration of the theory of value”. Indifference curve is a graph. Indifference curve analysis
measures utility ordinally. It is a curve that shows different combinations of the two goods
producing the same level of utility to the consumer is known as an indifference curve. So
basically it explains consumer behavior in terms of his preferences or rankings for different
combinations of two goods say X and Y. So indifference curve is drawn from the indifference
schedule of the customer. “An indifference schedule is a list of combinations of two commodities,
the list being so arranged that a customer is indifferent to the combinations, preferring none of the
other product.” For example in below figure of indifference curve Ujim is the indifference curve
that is the locus of points in which there are two points A and B showing the combination of the
two goods that are Qshirts and Qbats between which the consumer is different.

Example of indifference curve

(source-img.sparknotes.com/.../utility.gif)

A single indifference curve concerns only one level of satisfaction. But when there are a number
of indifferences curves are further away from the origin represent higher level of satisfaction as
they have larger combination of items. Such a diagram is known as indifference map. Example
of indifference map is shown in figure below.

Example of indifference map

(source-img.sparknotes.com/.../utility.gif)

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 Properties of Indifference Curve

Properties of indifference curve: - There are mainly four properties of indifference curve.

1. An indifference curve has a negative slope that means it slopes downwards.

According to Hicks, “so long as each commodity has a positive marginal utility, the indifference
curve must slope downward to the right.”

The negative slope of an indifference curve implies

• That the two commodities can be substituted for each other.

• That if the quantity of one commodity decreases, quantity of other must increase so that
the consumer stays at the same level of satisfaction.

Downward slope of indifference curve

Source-www.econport.org/images/graphs/CobbDouglas1.gif

In the above figure, clearly the indifference curve is moving downward. Again we can say that if
X is increasing then Y is decreasing and if Y is increasing then X is decreasing that is
implication of negative slope of indifference curve. But again at the same time the both
commodity X and Y are substituting for each other and satisfaction level of both at the same time
remains same. So both the implications of negative slope of indifference curve are fulfilled

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 Properties of Indifference Curve

2. Indifference curves are convex to origin

This property tells that indifference curves are not only negatively but are also convex to origin.
The convexity of the indifference curve implies two properties.

• The two commodities are imperfect substitution for one another.

• The marginal rate of substitution between the two goods decreases as a consumer moves
along an indifference curve.

The above two features of indifference curve is based on the postulate of diminishing marginal
rate of substitution. The postulate of diminishing marginal rate of substitution states a fact that if a
consumer substitutes one commodity

Convexity of the indifference curve

Source-www.econport.org/images/graphs/CobbDouglas1.gif

If we see the above picture then we can say that clearly the indifference curve is convex to origin.
And here the customer is giving up less and less units of Y in order to have equal additional units
of X also, the two commodities are not making the perfect substitution for one another. Thus an
indifference curve analysis is always convex to the origin because the marginal rate of
substitution between the two commodities declines.

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 Properties of Indifference Curve

3. Indifference curve can neither intersect nor be tangent with one another

According to this property if two difference curves intersect or are tangent with one another, it
will reflect two rather impossible conclusions.

• Those two equal combinations of two goods yield two different level of satisfaction.
• Those two different combinations one being larger than the other yields the same level of
satisfaction.

Actually such conditions are impossible if the consumer’s subjective valuation of a commodity is
greater than zero. Besides if two indifference curves intersect it would mean negation of
consistency or transitivity assumption in consumer’s preference.

Indifference curves can’t touch or intersect

(Source-http://phoenix.liu.edu/~tbarr/eco61/chapter3/intersecting-indifference-curves.png)

Now if we see the figure above, then at point C where two indifference curves cut each other.
Point B on 2nd indifference curve indicates higher satisfaction comparatively point A on 1st
indifference curve due to more distance for the origin but at the same time at point C which lies
on the both of the curves yields the same level of satisfaction which is purely absurd because B is
preferred to A. Since each indifference curves represents a different level of satisfaction,
indifferences curves can never intersect at any point.

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 Properties of Indifference Curve

4. Upper indifference curves represent a higher level of satisfaction than the lower
ones.

This property tells us that an indifference curve placed above and to the right of another
represents a higher level of satisfaction than the lower one. So in another words a higher
indifference curve to the right of another represents a higher level of satisfaction and preferable
combinations of two gods. For example in below figure there are five indifference curves U1, U2,
U3, U4, and U5. Clearly U1 is the nearest to the origin and U5 is the most distance from the
origin. And U1 is providing very less satisfaction, then U2 is more satisfactory than U1, U3 is
more satisfactory than U2 and U1 and this property goes on moving ahead and at last U5 is
providing more satisfaction than all the other 4 indifferences curves. So clearly the above figure
describes the fourth property of indifferences curve.

Example of higher level of satisfaction in indifferences curves

(Source-http://www.cdc.gov/owcd/eet/CBA/images/CBA_indif.gif)

Conclusion: - Indifference curves and their properties are one of the important concepts in the
field of managerial economics. It has certain limitation like it indicates preferences of consumer
only but actual selection of two goods depends upon the income of consumer and price of
product. But again we can not ignore the importance of indifference curve and its properties
because it measures utility ordinallly and it explains the consumer behavior in terms of his
preferences or rankings for different combination of two commodities.

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 Properties of Indifference Curve

References:-

1. Jhingan, M. L. and Stephen, J. K. (2008), Managerial Economics, Vrinda Publication (P) Ltd.,
Delhi
2. Mehta, P.L. (2003), Managerial Economics, S. Chand & Sons, New Delhi
3. Dwivedi, D.N. (2005), Managerial Economics, Vikash Publishing House (P) Ltd, New Delhi
4. http://www.cdc.gov/owcd/eet/CBA/images/CBA_indif.gif accessed on February 7, 2010
5. www.econport.org/images/graphs/CobbDouglas1.gif accessed on February 7, 2010
6. img.sparknotes.com/.../utility.gif accessed on February 7, 2010
7. http://phoenix.liu.edu/~tbarr/eco61/chapter3/intersecting-indifference-curves.png accessed on
February 7, 2010

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