INDIFFERENCE CURVE ANALYSIS

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 You should be able to:
1. Define the term Indifference Curve
analysis.
OBJECTIVES 2. Outline the assumptions and
limitations of Indifference Curve
Analysis.
3. Define the term Indifference Curve,
construct one and discuss its
properties/characteristics.
4. Explain the term Marginal Rate of
Substitution (MRS) and calculate
it.
5. Define the term Indifference Map
and assess the level of
satisfaction for each curve.
 It is an approach to measuring
WHAT IS consumer behaviour based on the
INDIFFERENCE level of satisfaction they receive
CURVE ANALYSIS from various combinations of two
goods.
Recall it is the,
❏ Ordinal Approach to
measuring satisfaction- the
perspective that utility can
NOT be measured but rather
the level of satisfaction is
ranked.
 Assumptions of Indifference
WHAT IS Curve Analysis
INDIFFERENCE 1. The consumer acts rationally (weighing
CURVE ANALYSIS the pros and cons of their decisions) and
are knowledgeable about the prices in
the market, thus aiming to maximise
his/her satisfaction.
2. The consumer always tends to move to a
higher indifference curve, seeking a
higher level of satisfaction.
3. There are ONLY two goods being
consumed in the analysis.
4. The consumer ranks his/her preferences
on the basis that any combination will
yield(give them) the same level of
satisfaction.
 Assumptions of Indifference
WHAT IS Curve Analysis
INDIFFERENCE 5. The consumer’s tastes, habits and
CURVE ANALYSIS income remain the same throughout
the analysis.
6. There is a Diminishing Marginal rate
of substitution: the rate at which a
person is willing to substitute more of
one good for another decreases with
each successive substitution. I.e. they
sacrifice/ give up less each time.
 Limitations of Indifference
WHAT IS Curve Analysis
INDIFFERENCE
1. It analyses the choice of only two
CURVE ANALYSIS goods at a time. There is no scope
for comparing buying decisions of
multiple commodities
simultaneously.
2. The theory assumes that all
consumers behave rationally.
Sometimes, buying decision is made
irrationally, or on emotional factors.
A consumer maybe attached to a
particular brand for emotional
reasons. This is totally ignored in
the study.
 Limitations of Indifference
WHAT IS
Curve Analysis
INDIFFERENCE
3. The consumer may not possess
CURVE ANALYSIS
complete information about the
prices of the goods in the market in
all case.
4. Buying behaviour of consumers
may differ widely in unstable
economic conditions. Indifference
analysis takes into account only
normal circumstance, related to
satisfaction.
1. Preferences are 2. Consumers aim to maximize their
measured satisfaction

3. Allows for buying 4. Some purchases made are done

decisions of multiple irrationally
commodities simultaneously.

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ASSUMPTIONS AND LIMITATIONS ACTIVITY

 ● An indifference curve
represents various
WHAT IS AN combinations of two
INDIFFERENCE goods that consumers
CURVE are indifferent to
choosing because they
give them the same level
of satisfaction.
● Any combination chosen
will make the consumer
equally satisfied.
 WHAT IS AN
INDIFFERENCE
CURVE
 WHAT IS AN
INDIFFERENCE
CURVE
 Properties of an
Indifference Curve
WHAT IS AN The indifference curve (IC) has certain
INDIFFERENCE properties or characteristics, which are
CURVE as follows:

● Indifference Curves are negatively

sloped
● Higher curves represent a higher
satisfaction level
● Indifference Curves are convex to the
origin
● Indifference Curves do NOT intersect
 ● The shape of an indifference curve
reflects a consumer’s willingness to
substitute one good for another while
remaining equally satisfied, which is
MARGINAL RATE measured as the ‘marginal rate of
OF SUBSTITUTION substitution’ (MRS). i.e. The MRS
indicates for example how much of
(MRS) good y a consumer is prepared to give
up to get one more unit of good x, while
remaining equally satisfied.
● Formula for MRS is: Change in the good
being given up divided by change in the
good being gained. Therefore if good Y
is being given up and X being gained,

NOTE: The MRS diminishes the further along the curve we

move, hence MRS is the slope of an indifference curve
and causes it to be convex to the origin.
CALCULATING
MRS

CAN YOU
GUESS?
What is the MRS for each combination above?
 COMBINATION MRS

A - The law of Diminishing

Marginal Rate of substitution
B 9 -14/2-1 = - 5.00 (DMRS) states that less and
less quantity of one good is
C 6 - 9/ 3-2 = - 3.00 sacrificed in order to get one
more additional unit of another
D 4 -6/ 4-3= - 2.00 good. Therefore MRS declines
as you move point A to E.
E 2.5 - 4/ 5-4= - 1.50

NOTE: We use the absolute value in our interpretation of the MRS value.

CALCULATING MRS
 WHAT IS AN
An Indifference Map
INDIFFERENCE
MAP is a graphical
representation of
two or more
indifference curves.
 WHAT IS AN
INDIFFERENCE
MAP

● IC1 and IC2 are two indifference curves.

● IC2 is higher than IC1 and yields a higher level of
satisfaction.
● Q is a point on IC2 and S is a point on IC1. Combination
at point Q contains more of both the goods (X and Y)
than that of the combination at point S.
● As a rational consumer seeking to maximize your
satisfaction, you would most prefer pont Q and least
prefer point S.
 TASK
1. Define the term Indifference curve.
2. Plot the Indifference Curve for the
data provided.
3. Calculate the MRS.
4. Explain why the curve is negatively
sloped.
5. Draw a new indifference Curve
called IC2 and explain why a
consumer would Most prefer a
combination called E on that curve.
6. Draw a new indifference Curve
called IC3 and explain why a
consumer would Least prefer a
combination called F on that curve.

Practice question
QUIZ

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IC Question- GRADED TASK
1. Plot the Indifference Curve for the
data provided. Place oranges on the
Y-axis 4 marks
2. Calculate the MRS. 4 marks
3. Draw a new indifference Curve called
IC2 and explain why a consumer
would Most prefer a combination
called Q on that curve. 3 marks
4. Draw a new indifference Curve called
IC3 and explain why a consumer
would Least prefer a combination
called P on that curve. 3 marks