Indifference Curve Analysis

Indifference curve refers to the curve representing all the combination(market basket) of goods which gives same level of satisfaction to the consumer, so that the consumer is indifferent to choose a particular combination . All combination of goods in IC are equally desirable or preferable to consumer.

Assumption:
1.Rationality
2.Ordinal approach of measurement
3.Diminishing marginal rate of substitution.
4.Total satisfaction depends on quantity consumed.
5.Consistency
    If A is greater than B, then B is not greater than A.
6.Transitivity
   If A is greater than B;B is greater than C, then A is greater than C.

Derivation of Indifference Curve
   Let us assume, there are two goods in the market:good x and good y.The consumer can consume        different units of x and y goods, but the final/total satisfaction derived by all combination are equal.    When consumer increases the consumption of 1 good, he should automatically decrease the                consumption of another good.

In above figure, goods x and good y is measured along x and y axis respectively. IC is the indifference curve convex towards the origin.The curve follows the law of diminishing MRS. All combination gives the same level of satisfaction to the consumer.

Properties of Indifference Curve
     1.Indifference Curve slopes downward.
IC slopes downward due to non-satiety nature of the consumer.i.e the consumer prefers more goods to less of it.To maintain the same level of satisfaction if the consumer gains some utility from X, he must loose some utility from Y.i.e if the consumer increases the units of X, he must sacrifice some units of Y.It means there is inverse relation between X and Y.

    2.Indifference Curve is convex towards the origin.
IC is convex towards the origin due to the law of diminishing MRS.If IC is concave, its MRS will be increasing and if IC is straight line,MRS will be constant which is not possible.So IC is always convex towards the origin representing the diminishing MRS.

3.Higher Indifference curve gives the higher level of satisfaction
A higher Ic always gives the higher level of satisfaction to the consumer.In the figure below,IC2 gives the maximum satisfaction in compared ti Ic0 and IC1. Here the consumer can consume more quantity of both X and Y goods.

4.Indifference curve cannot intersect each other.
Two Ics can never intersect each other, because as per the law,higher Ic gives the higher level of satisfaction.And lower gives the less.If two of them intersect each other,it means both gives the same level of satisfaction,which is impossible.