Definition indifference curves.
Indifference curves show different combination of goods which give consumers the same utility. In other words, consumers will be indifferent to the different combination of goods because they give same utility.
Diagram of Indifference Curve
This diagram shows three indifference curve. If we take Indifference Curve I1, it means that the consumer would be equally happy with say :
- 10 Good Y, and 1 Good X
- 5 Good Y, and 5 Good X
- 1 Good X and 10 Good X
Any point on each indifference curve gives consumer same net utility.
Diminishing Returns and Indifference Curves
Indifference curves tend to be negatively sloped because of diminishing returns. If you gain more good X, the utility of X starts to show diminishing returns – additions to total utility are increasingly small. Therefore, as you get more good X, the extra good X is worth less.
An indifference map shows different indifference curves.
Indifference Curves and Budget Line
To maximise welfare, a consumer will examine his budget and see the furthest indifference curve he can reach.
The blue line represents the maximum combination of goods you can buy give your limited budget. The point where the budget line meets an indifference curve, shows the best combination of goods, given the existing budget constraint.