Properties of Indifference Curves

In consumer theory, economists assume that the preferences of consumers exhibit certain properties or characteristics. These properties enable us to make statements about the general pattern of indifference curves.

First, more goods are preferable to fewer goods—thus, bundles on indifference curves lying farthest to the northeast of a diagram are always preferred. Let’s assume, a consumer consumes only two commodities, X and Y, that are both desired, the individual will always prefer a bundle with more of one good (without loss of the other) to the original bundle.

An indifference curve can be derived when there are two elements in every choice: (1) preferences (the desirability of various goods) and (2) opportunities (the attainability of various goods). It is related to the former: preferences. It separates better (more preferred) bundles of goods from inferior (less preferred) bundles, providing a diagrammatic picture of how an individual ranks alternative consumption bundles.

Second, goods are substitutable—therefore, indifference curves slope downward to the right. Given the fact that every commodity is defined so that more of it is preferred to less, indifference curves slope downward to the right or it follows that indifference curves must have a negative slope.

This definition is about the slope of indifference curve, which also indicates the alternative or opportunity cost of consuming good X more in terms of good Y. Moving along the indifference curve does not change the utility.

Third, indifference curves cannot cross each other, if they did, the rational ordering among preferences would be violated.

Fourth, indifference curves are everywhere dense. We can draw an indifference curve trough any point on the diagram. This simply means that any two bundles of goods (commodity bundle) can be compared by the consumers.

Fifth, the valuation of a good declines as it is consumed more intensively—therefore, indifference curves are always convex. As we noted above, the slope of the indifference curve represents the willingness of the individual to substitute one good for the other. This is also defined as the marginal rate of substitution (MRS), which refers to the amount of good X that is just sufficient to compensate the consumer for the loss of a unit of the good Y. Reflecting the principle of diminishing marginal utility, MRS of a good Y will decline as the good X is consumed more intensively relative to other goods Y. This means that as his or her consumption of good X increases (and his or her consumption of good Y declines), his or her valuation of good X relative to good Y will decline, and vice versa. Therefore, since the valuation of each good declines as it is consumed more intensively, indifference curves must be convex to the origin.