Indifference Curves in Economics: What Do They Explain?

What Is an Indifference Curve?

An indifference curve is a chart showing various combinations of two goods or commodities that consumers can choose. Points along the curve represent combinations that will leave the consumer equally well off. A consumer is indifferent to changes in a combination as long as it falls somewhere along the curve.

Look at this indifference curve. You may be indifferent to buying a combination of 14 hot dogs and 20 hamburgers, a combination of 10 hot dogs and 26 hamburgers, or a combination of nine hot dogs and 41 hamburgers if you like both hot dogs and hamburgers. Each of these three combinations provides the same utility.

Understanding Indifference Curves

Standard indifference curve analysis operates using a simple two-dimensional chart. Each axis represents one type of economic good. A consumer will have no preference between any of the combinations of goods represented by points on the curve because the combination of goods on an indifference curve provides the same level of utility to the consumer.

A young boy might be indifferent between possessing two comic books and one toy truck or four toy trucks and one comic book. Both of these combinations would be points on an indifference curve of the young boy.

Indifference curves are heuristic devices that are used in contemporary microeconomics to demonstrate consumer preference and the limitations of a budget. Economists have adopted the principles of indifference curves in the study of welfare economics.

Indifference Curve Analysis

The slope of the indifference curve is known as the marginal rate of substitution (MRS). The MRS is the rate at which the consumer is willing to give up or substitute one good for another. A consumer who values apples will be slower to give them up for oranges and the slope will reflect this rate of substitution.

Each indifference curve is typically convex to the origin and no two indifference curves ever intersect. Consumers are always assumed to be more satisfied when they're achieving bundles of goods on indifference curves that are farther from the origin.

An individual will typically shift their consumption level as their income increases because they can afford more commodities. They'll end up on an indifference curve that's farther from the origin as a result and hence better off.

Indifference curve analysis emphasizes marginal rates of substitution (MRS) and opportunity costs. It typically assumes that all other variables are constant or stable.

Most economic textbooks build upon indifference curves to introduce the optimal choice of goods for any consumer based on that consumer’s income. Classic analysis suggests that the optimal consumption bundle takes place at the point where a consumer’s indifference curve is tangent with their budget constraint.

Criticisms and Complications of the Indifference Curve

Like many aspects of contemporary economics, indifference curves have been criticized for oversimplifying or making unrealistic assumptions about human behavior.

Consumer preferences might change between two points in time, rendering specific indifference curves practically useless. Other critics note that it's theoretically possible to have concave indifference curves or even circular curves that are either convex or concave to the origin at various points.

The Bottom Line

An indifference curve is a tool used in economics and business. Each point on the curve is a different combination of two goods in various quantities. Any point on the curve will theoretically provide equal satisfaction or utility to an individual. Consumers are thus "indifferent" to which combination they choose over another.

Indifference curves have been criticized for making unrealistic assumptions about consumer behavior. Some economists argue that every choice indicates a preference for one combination over another rather than indifference to the outcome. Others note that consumer preferences can change over time. This would make a given indifference curve useless for any analysis.