The indifference curve is about a microeconomic representation as part of household theory. With the help of the indifference curve, several combinations of goods are shown, all of which bring the same benefit to a consumer. This approach is based on the assumption that consumers simply do not care what good they need in a specific case.
The following lesson is about the indifference curve and how to apply it. There are also some exercises afterwards with which you can deepen the knowledge you have learned.
- Synonyms: Iso-utility curve | Iso-utility function
- English: indifference curve
Why is the indifference curve important?
According to phonejust.com, the indifference curve is used to reflect the preferences of the users and the possibility of needs satisfaction. Companies and economists can use the indifference curve to determine how needs can be met.
Necessity of the indifference curve
Consumers have different preferences. It is possible for consumers to choose the right one from different combinations of goods. In microeconomic theory, the premise is that consumers choose the bundle of goods that brings the greatest benefit.
Consumers base their choice on their own benefit. If two options bring the same benefit, the consumer’s choice is indifferent or indifferent. This results in the necessity of the indifference curve.
What is the indifference curve?
The indifference curve is a graphic curve that shows all bundles of goods that provide the same benefit for the consumer. Thus, all indifferent options for satisfying one’s own needs are presented.
Axioms of the indifference curve
The representation of the preferences of a curve are based on different axioms.
The representation of the indifference curve is based on the following two axioms:
- Completeness axiom
- Transitivity axiom
The indifference curve is shown as a graph in a coordinate system. The amount of consumption of one good is on the x-axis and the amount of the other product is on the vertical axis.
It is therefore always a case of two goods. There are then an infinite number of combinations of goods that the consumer can choose. All combinations are equally useful for the consumer. The indifference curve results from the connection of all these combinations.
Properties of the indifference curve
The indifference curve has different properties, all of which reflect the individual preferences of consumers:
- Higher indifference curves are preferred
- Indifference curves have a negative slope
- Indifference curves are convex
- Indifference curves do not intersect
The different utility functions
In economics there are three different utility functions, all of which have associated indifference curves.
These are the three following variants:
- Perfect substitutes
- Perfect complements
- Imperfect substitutes
The perfect substitute is a utility function in which all goods are freely interchangeable. The benefits are exactly the same for the consumer.
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The perfect complements are goods that complete each other. Consumers need both goods. Just one good alone cannot benefit the consumer. The formula is therefore a minimum function, since every complement needs the appropriate counterpart in order to generate a benefit.
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The imperfect substitutes represent a further utility function. The imperfect substitutes are goods that bring a similar benefit, but with inherent differences.
For example, the goods differ in terms of price or quality. The “ Cobb-Douglas function ” is the most common variant of imperfect substitutes.
The brands “Billobräu” and Premium Ale both produce beer. Both beers have the same alcohol content and are sold in glass bottles. However, the two brands differ in taste, quality and price.