Indifference curves trace the combination of goods that would give a consumer a certain level of utility. The indifference curve itself represents a series of combinations of quantities of goods (generally two) that a consumer would be indifferent between, or would value each of them equally in regards to overall utility. Indifference curves allow economists to predict consumer purchasing behaviors based upon utility maximization for a bundle of goods within the context of a given consumer's budget constraints and preferences.
Properties of Indifference Curves
The concept of an indifference curve is predicated on the idea that a given consumer has rational preferences in regard to the purchase of groupings of goods, with a series of key properties that define the process of mapping these curves:
- Indifference curves only reside in the non-negative quadrant of a two-dimensional graphical illustration (or the upper right). This assumes that negative quantities are meaningless - one can't consume a negative amount of a good.
- Indifference curves are always negatively sloped. This is based on the assumption that a consumer is always better off consuming more of a good, so as quantity consumed of one good increases, total satisfaction would increase if not offset by a decrease in the quantity consumed of another good. This also assumes that the marginal rate of substitution is always positive.
- All curves projected on the indifference map must also be transitive to ensure that if
$A$ is preferred to$B$ and$B$ is preferred to$C$ ,$C$ is not also preferred to$A$ . This is manifested in indifference curves that never intersect. - Nearly all indifference lines will be convex, or curving inwards at the center (towards the bottom left). This demonstrates that increasingly high quantities of one good over another have a cost in respect to their overall utility per unit (diminishing returns). It is technically possible for indifference curves to be perfectly straight as well, which would imply that the two goods are identical (perfect substitutes).
Combining these various properties, one can highlight a number of critical implications of consumer purchasing behavior and the concept of utility. Consumers naturally desire a bundle of goods that is varied (hence the convex curves for most comparisons) in order to maximize their utility. Similarly, all indifference curves will naturally identify diminishing rates of substitution as the quantity increases for a certain good compared to another, and can create demand projections of prospective supply.