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Economics Notes
Q. No. 5: Define Indifference Curve. State and prove properties of indifference Curves. Answer: INTRODUCTION: The concept of utility discussed under cardinal approach was criticized by many economists. Utility is purely a subjective concept and it cannot be measured. So, the satisfaction attached to different commodities can only be ranked. The concept of indifference curves was first introduced by F. Y. Edge-worth. Later on it was explained by two economists R. G. D. Allen and J. R. Hicks. INDIFFERENCE ANALYSIS: Indifference analysis presented by J. R. Hicks has two components. Indifference Set Indifference Curve Indifference Set: A group of combination of two good that gives the same satisfaction to the consumer is called indifference set. Indifference Curve: Indifference curve is a curve which shows different combinations of two commodities which gives equal satisfaction to the consumer.

ASSUMPTIONS: Ordinal analysis is based on the following assumptions. 1: The consumer is assumed to be rational and his objective is to get maximum satisfaction. 2: Consumer has different combinations of two commodities. 3: Goods are perfect substitutes. 4: Marginal rate of substitution is diminishing. 5: Level of satisfaction is assumed to be same. SCHEDULE: Combination s A B C D Explanations:
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Unit of Goods X 1 2 3 4

Unit of Goods Y 15 11 8 6

MRS=

Y X

---4/1 = 4 3/1 = 3 2/1 = 2

Level of Satisfaction K K K K

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Economics Notes
According to the schedule, consumer has 4 combinations A, B, C & D. All combinations give same level of satisfaction K. Therefore consumer will remain indifferent between such combinations. Combination A shows that consumer consumes 1 unit of goods X and 15 units of goods Y. Combination B shows that if consumer wants to consume one more unit of goods X he must sacrifice some units of good Y. Similarly combinations C and D shows that with the increase in goods X, units of good Y must decreases. Due to this marginal rate of substitution is diminishing. DIAGRAM:
yaxis

15 12 9 6 3 0 1

Units of Good sY

B C D

IC

x-axis 2 3 Units of Goods X 4

In the above diagram units of goods X is shown along x-axis while units of good Y are measured along y-axis. Point A shows the combination of 1 unit of good X and 15 units of good Y. points B, C, & D shows that with the increase in units goods X, units of good Y must be decrease. By joining point A, B, C & D we get indifference curve. This curve is convex to the origin due to diminishing MRS. PROPERTIES FO INDIFFERENCE CURVES: The properties of ICs are as follows: 1: Indifference curves are negatively sloped. 2: Indifference curves are convex to the origin. 3: Higher the IC, higher the satisfaction. 4: Indifference curves never intersect each other. 5: Indifference curves never touch axis.

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Economics Notes
1: Indifference curves are negatively sloped:
y-axis

y2
G O O D Y

A B

y1

IC x1 x2
x-axis

GOOD X

Due to MRS, slope of indifference curve is negative. If consumer shifts from point A to B, one units of good y must be sacrifice to get one more unit of good x. This property can proved by the following ways. Suppose IC is Horizontal:
y-axis G O O D Y

y1

b IC

x1

x2

x-axis

GOOD X

If consumer moves from point a to b, units of x increases while units of y remains same in this situation MRS does not apply. Therefore it will not be an indifference curve. Suppose IC is Vertical:
y-axis

IC A B

y2
G O O D Y

y1

x1
GOOD X

x-axis

If consumer moves from point a to b, units of good y decreases while units of x remains same. In this situation MRS also not applied. Therefore it will not be on IC. Suppose IC is Positively Sloped:

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Economics Notes
y-axis

IC b a

y2
G O O D Y

y1
x-axis

x1

x2

GOOD X

If consumer shifts form point a to point b, then units of both commodities are increased. Satisfaction level at point b is greater than the satisfaction level at point a. Therefore it cannot be an indifference curve.
2: Indifference curves are convex to the origin:
yaxis

y4 G o o y3 d y y2 y1 0

B C D

IC x1 x4 x2 Good x x3 xaxis

Indifference curves are convex to the origin due to diminishing MRS. This property can proved by the following ways. Suppose IC is Concave to the Origin:

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Economics Notes
y-axis y3 G y2 o o d y1 y 0 A B C IC x-axis x1 x2 Good x x3

In this diagram, supposed IC is concave o the origin. Here MRS is increasing instead of diminishing which is unnatural. Because consumer will not sacrifice more and more units of Y to get more and more units of x. Suppose IC is Straight Line:
yyaxis 4 y3 G o o y2 d y y 1 0 x1 x2 x3 Good x x4 a b c d IC xaxis

According to this diagram MRS remains constant, which is unnatural. Therefore it will not be an IC.
3: Higher the IC, Higher the Satisfaction:

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Economics Notes

y-axis

y2
G o o d y

y1

a IC1

IC2

x1
Good x

x2

x-axis

In the above diagram point b shows more units of x and y as compared to point a. Therefore higher IC gives more satisfaction to the consumer.

4: Indifference Curves Never Intersects Each Other:

y-axis

G o o d y 0

a c b IC 1 x-axis IC2

Good x

According to this diagram Satisfaction at point a Satisfaction at point a But Satisfaction at point b
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= =

Satisfaction at point b Satisfaction at point c Satisfaction at point c

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Economics Notes
Because point c lies on Higher IC, its satisfaction is greater than the satisfaction level of point b Therefore ICs never intersect each other. 5: Indifference Curves Never Touch Axis:
y-axis a G o o d y Good x y=0 b x=0

x-axis

Indifference curve represents a two-commodity model. If it touches (y-axis) at point a, units of x becomes zero. if IC touches xaxis at point b, units of y becomes zero. at point a and b it becomes one commodity model. This is against the assumption of the model. Therefore ICs never touch axis.

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