Indifference Curves

Definition

• An indifference curve illustrates all combinations of two goods that provide the same level of total utility to the consumer.
• Focuses on two goods for simplicity (e.g., chocolate bars and pounds of fruit).

Graphical Representation

• Vertical Axis: Quantity of chocolate bars.
• Horizontal Axis: Quantity of fruit in pounds.
• Example points:
  • 5 pounds of fruit and 15 bars of chocolate.
  • 7 pounds of fruit and 10 bars of chocolate.

Understanding Indifference

• Points on the same indifference curve represent combinations where the consumer is indifferent.
• Moving along the curve does not change total utility.

Preferences

• Points below the indifference curve = less preferred.
• Points above the indifference curve = more preferred.
• Each point on the curve represents the same utility; however, more goods (above curve) are always preferred.

Slope Analysis

• The slope of the indifference curve is the marginal rate of substitution (MRS).
• Slope: Measures how many units of one good a consumer is willing to give up for additional units of another good without changing utility.
• Tangent Line Slope: Instantaneous rate of substitution at a specific point on the curve.

Marginal Rate of Substitution (MRS)

• MRS is negative because increasing one good entails decreasing the other to maintain the same utility.
• Example Calculation:
  • If you give up 5 chocolate bars for 2 pounds of fruit, MRS = -2.5 bars per fruit.
  • Slope becomes less steep as more fruit is consumed (willingness to trade decreases).
  • Changes along the curve; steeper when more chocolate bars are initially available.