INDIFFERENCE CURVE AND

MARGINAL RATE OF
SUBSTITUTION
MANAGERIAL ECONOMICS

PRESENTED BY :

ANKITA JAIN

INDIFFERENCE SCHEDULE
An indifference schedule can be defined as a
schedule of various combinations of goods that
give equal level of satisfaction to the consumer.

Hence the consumer

between them.

becomes

indifferent

We would like to explain it with the help of an

example.

Table 1: Indifference Schedule

BUNDLES

GOOD 1

GOOD 2

12

This table shows 5 different bundles- A, B, C, D and E of good

1 and 2. These different bundles give the same level of
satisfaction to the consumer. It means the amount of
satisfaction a consumer derives from the bundle of 1 unit of
good 1 + 12 units of good 2( bundle A), the same satisfaction
he derives from the bundle of 2 units of good 1+8 units of good
2( bundle B) and so on. Thus, the consumer likes all these
bundles equally and remains indifferent between them. That is
why this schedule is called an indifference schedule.

INDIFFERENCE CURVE
An indifference curve shows combination of
goods that yield the same satisfaction to the
consumer. Thus a consumer is indifferent
between the combinations indicated by any
points on one indifference curve.
The graphical representation of a indifference
schedule becomes the indifference curve.

Figure 1
14

Y
A

12
10

Good 2

Y-axis

IC

0
0

Good 1

INDIFFERENCE MAPPING

Indifference map is a group or set of indifference curves

each one of which represents a given level of
satisfaction.
As IC goes further from the origin, the level of
satisfaction is higher.
(2)

(1)

MARGINAL RATE OF SUBSTITUTION

Marginal rate of substitution is the rate at which
the consumer is willing to substitute one good
for another without changing the level of
satisfaction.
When a consumer increases the quantity of a
commodity he has to sacrifice some quantity
of another commodity so that the level of
satisfaction remains the same.

Good 2

BUNDLES

GOOD 1 (UNITS)

GOOD 2 (UNITS)

MRS

12

4:1

3:1

2:1

1:1

This example shows the different combinations of good

1 and good 2 which give equal satisfaction to the
consumer. In the beginning the consumer has 1 unit of
good 1 + 12 units of good 2 (bundle A). Now in order to
get an additional unit of good 1 , he is prepared to give
up 4 units of good 2 (bundle B) , hence MRS will be
4:1. It implies that the consumer gets the same
satisfaction from 2 units of good 1 + 8 units of good 2
as he gets from 1 unit of good 1 + 12 units of good 2.
thus, marginal rate of substitution between two goods
can be estimated with the help of following formula :
MRSx1,x2 = x2 /x1 ( good 2/ good 1)
The absolute vale of the slope of an indifference curve
indicates the marginal rate of substitution.
Thus MRS is the slope of indifference curve.

Assumptions of Indifference Curve

1. Rationality- Consumer wants to maximize
his total satisfaction
2. Ordinal Utility- Utility cannot be
measured quantitatively.
3. Non satiety- Point of Saturation is not
reached. He still demands for more.
4. Transitivity of choice- Taste is consistent.
If A>B & B>C, then, A>C
5. Diminishing marginal rate of substitution

DIMINISHING MARGINAL RATE OF

SUBSTITUTION
The law of Diminishing marginal rate of substitution
states that as good 1 is substituted for good 2, the
marginal rate of substitution of good 1 for good 2
goes on diminishing.
As the consumer increases the quantity of one good,
the marginal rate of substitution goes on diminishing.

 According to our example the consumer has 1 unit of

good 1 + 12 units of good 2, then in order to get one
additional unit of good 1, he is prepared to give up 4
units of good 2 . But to get the third unit of good 1 ,
he is prepared to give up only 3 units of good 2.
Similarly, to get fourth and fifth units of good 1he is
prepared to give up only 2 and 1 unit of good 2
respectively. Thus, inorder to get every successive
unit of good 1 the consumer is ready to give up less
and less units of good 2 . This shows the diminishing
marginal rate of substitution and it can be shown by
an indifference curve.

MRS GOES ON DIMINISHING

Since no 2 goods are perfect substitutes of each other,
therefore MRS diminishes along the Indifference Curve. In
case any 2 goods are perfect substitutes, the IC will be a
straight line having a negative slope, showing a constant
MRS.
Since goods are not perfect substitutes the subjective value
attached to the additional quantity (marginal utility ) of a
commodity decreases fast in relation to other commodity
whose total quantity is decreasing .
Therefore the consumer will be increasingly unwilling to
sacrifice more units of one good for another. Thus , MRS is
decreasing.

THANK YOU!