Understanding Indifference Curves
An indifference curve represents combinations of goods that provide equal satisfaction.
The marginal rate of substitution (MRS) is the rate at which a consumer is willing to
exchange one good for the other to maintain the same level of satisfaction.
Every consumer has an indifference map of curves representing different levels of
satisfaction.
An indifference curve is a set of points
representing combinations of goods that a
consumer finds equally satisfying. In the
example on the left, the goods are toys and
snacks.
All indifference curves slope downward. The
economic meaning of downward sloping is
that if you take away some of the goods on
the vertical axis, you can compensate the
consumer with some of the goods on the
horizontal axis to maintain the consumer’s
same level of satisfaction. After all, the
consumer is indifferent to the combinations.
All sets of points to the northeast of the
original indifference curve lie on other
indifference curves. In the example on the left,
combinations of goods that lie on the higher
indifference curve represent more of both
snacks and toys. This fact reflects the
assumption that “more is better.”
All points on the higher curve represent
combinations that yield a greater satisfaction
than any of the combinations on the lower
curve.
Recall from algebra or from the previous
lectures on graphing that the slope of a curve
at any point is the slope of a tangent line at
that point. An indifference curve is convex,
meaning that the slope decreases as you go
down it.
The economic interpretation of the slope is
called the marginal rate of substitution
(MRS) or the rate at which the consumer is
willing to trade one good for another.
The MRS is large near the top of the curve.
This means that at the top, this consumer has
a lot of snacks and not many toys. To maintain
the same satisfaction, he is willing to give up
many snacks and be compensated with just a
few toys.
At the lower end of the indifference curve, this
consumer has a small MRS. He has a lot of
toys but few snacks. To maintain his
satisfaction, if he gives up one snack, he will
have to be compensated with a lot of toys.
Conversely, if he gives up one toy, you will not
have to compensate him with many snacks.
Each consumer has an indifference map of
indifference curves in the goods space.
Each indifference curve represents different
levels of satisfaction.
Because of the principle of “more is better,”
you can say that the higher ones are preferred
to the lower ones.
Indifference curves do not indicate specific
amounts of satisfaction. They are ordinal,
meaning that one is preferred over another.
The final property of indifference curves is that
indifference curves can never cross.
Consider a case where indifference curves do
cross at point b: D is preferred to A, and C is
preferred to E because D and E are on a
higher curve. But if they cross,
then A = B = C. Thus, A is preferred to E, and
in that case, E = B = D. This result tells us
that A is now preferred to D, which contradicts
the original statement.