Indifference

Curve Analysis
IT’S A “ZENITH” PRESENTATION

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 Outline of the Presentation
What is Indifference Curve??
Properties of Indifference curve.
Consumer Equilibrium.
Income Effect.
Income Consumption curve.
Price Effect.
Price Consumption Curve.
Substitution Effect.
Conclusion.

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 What is Indifference Curve??
An Indifference Curve is defined as the
locus of points each representing a
different combination of two substitute
goods, which yield the same utility or
level of satisfaction to the customer.
An Indifference Curve is also called as Iso-
utility curve and Equal utility curve.

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 Example:Indifference Curve Analysis
A consumer consumes two goods A and B
and he makes five combinations a,b,c,d
and e of the two substitute commodities.
Combinations Units of Commodity Units of Commodity
Total
A B Utility
a = 25 3 u
b = 15 5 u
c = 8 9 u
d = 4 17 u
e = 2 30 u

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If the consumer
had greaterIndifference Curves
income,
30
more of either or
both25products
15

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Quantity of A

3 5 9 12 17 30
Quantity of B

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Indifference Curves: Properties
Indifference curve have a negative
slope.

Indifference curve of imperfect

substitutes are convex to the
origin.

Indifference curve do not intersect

nor are they tangent to one
another.

Upper indifference curves indicate

a higher level of satisfaction.
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 Consumer Equilibrium
The indifference map in combination with the
budget line allows us to determine the one
combination of goods and services that the
consumer most wants and is able to purchase.
This is the consumer equilibrium.
The consumer maxi-
mizes satisfaction by
purchasing the
combination of
goods that is on the
indifference curve
farthest from the
origin but attainable
given the
consumer’s budget.
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 Income Effect

The Income Effect is defined as the

total change in the quantity
consumed of a commodity due to
change in its income.
The increase in demand on account
of an increase in real income is
known as income effect.
The increase in real income
encourages the consumer to
demand more goods and services.

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 Income Consumption Curve
Income Consumption Curve is
defined as a curve that joins
different equilibrium points when
the income of the consumer
changes with fixed price.

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 Price Effect

The Price Effect is defined as

the total change in the
quantity consumed of a
commodity due to change
in its price.

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 Price Consumption Curve

Price Consumption Curve is a

locus of points of
equilibrium on indifference
curves, resulting from the
change in the price of a
commodity.

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 Substitution Effect

Substitution Effect arises due to

the consumer’s inherent
tendency to substitute cheaper
goods for the relatively
expensive ones.

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 Conclusion
The indifference curve indicates
what the consumer is willing to buy

The budget line shows what the

consumer is able to buy

When the indifference curve and

the budget line are combined, we
find the quantities of each good the
consumer is both willing and able
to buy

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