Indifference curve

Also known as: Iso-utility function, iso-utility curve, utility isoquant

In microeconomics and especially in household theory, the indifference curve is a very common construct. The indifference curve shows the combination of several goods that are responsible for the same household benefit. In theory, it is assumed that households do not care how their needs are met.

Definition / explanation

The term indifference curve is derived from the Latin "indifferent" (translated as "not differing"). Knowing about consumer preferences also makes it possible to represent them in graphical form. If the graphical representation of the preferences of consumers is generated, one speaks of an indifference curve.

As the name suggests, all bundles of goods that represent the same satisfaction for the consumer (which are thus indifferent / equivalent for the consumer) are shown on the indifference curve.

In order to get to the graphical representation of the bundle of goods within the indifference curve, the consumer is presented with a bundle of goods and left to decide how much of the corresponding good he is willing to give in order to receive more of another good in return and thus increase his level of satisfaction hold and thus to be indifferent between the individual bundles of goods.

Within a diagram created from this, points are obtained which, connected with one another, lead to the indifference curve. The curve can take several different courses.

Construction of the indifference curve

Indifference curve

To construct an indifference curve, in the corresponding two-goods case, the amount of consumption of good 2 is recorded on a horizontal axis (X-axis) within a coordinate system and the amount of consumption of good 1 is recorded on the vertical axis (Y-axis) .

It is assumed that both goods are infinitely divisible. This allows an infinite number of points to be defined within the coordinate system, between which the respective individual is indifferent.

The curve that results from the setting of the points within this coordinate system is then referred to as the corresponding indifference curve.

Properties of the indifference curve

By definition, the indifference curve incorporates the subjective preferences of an individual, which means that a completely objective representation is not possible. In this way, the properties of the indifference curve are also determined by the individual.

Infinite indifference curves

Due to the fact that a need is satisfied from many different goods, theoretically any number of goods as well as points could be drawn in the axes of the indifference curve. From a certain level, however, the representation would lead to confusion.

If all the curves for many different goods were drawn in the coordinate system, only a confusing and unhelpful representation would take place within the coordinate system.

Summary

  • is a common tool within microeconomics and the sub-area of household theory
  • implements the representation of goods that have the same responsibility within a household
  • represents a combination of quantities of goods within which an indifferent household is given
  • reflects the subjective preferences of an individual and is thus determined by the individual
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