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Demand Analysis: Indifference Curves

Demand Analysis: Indifference Curves



Indifference curves


Indifference curve analysis is a simplified, graphical economic model that helps to explain consumer choice. This model assumes that an individual consumer is making a choice between two goods, and will choose to purchase an optimum combination of the two goods within a given budget.

It must be assumed that for a consumer, more of a good is always preferable to less.

An indifference curve plots all combinations of the quantities of two goods for which a consumer has no preference of one combination over others. If the quantity of one good is increased, then the quantity of the other good must be decreased. Otherwise, the consumer would not be indifferent. More is better.

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An indifference curve is bowed inward toward the origin. This is because of decreasing marginal utility. As more of one good is consumed, the amount of total utility added will decrease. Since adding one more good means decreasing the other good, the consumer would only be indifferent between two bundles if they lie on a curve that is bowed in.

An indifference map can show a series of many different indifference curves together. An indifference curve that is further from the origin would be preferable to one that is closer to the origin.

Indifference curves cannot intersect each other. If they did, they would violate the assumption that more is better.

The optimal bundle of the two goods for the consumer would depend on the amount that the consumer has budgeted for the combination of the two goods.

Given a fixed price for each good, the consumer can spend all of the budget on one good, all of the budget on the other good, or any combination of the two goods which spends the entire budget. A budget line (or budget constraint) would be a downward sloping straight line on an indifference map, representing all combinations of the two goods that add up to the total budget for the two goods.

Since an indifference curve as far from the origin as possible is preferred, the optimal bundle would be the one that lies on the budget line and touches the right-most indifference curve. Given the bowed in shape of indifference curves, this would be only one point on the indifference map.

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