Properties of Indifference Curves
i. Downward Sloping Indifference curves are downward sloping. This is because of the assumption of nonsatiation. You know that an indifference curve shows various such combinations of two goods which give same utility to the consumer. As per assumption of nonsatiation, more is better; this will be negated on an upward sloping indifference curve.
ii. Higher Indifference Curve Represents Higher Utility. An indifference curve placed higher will represent higher level of utility. Let us explain how. Observe the curves in Panel “a” of Figure . If we consider point A on the curve I, and point C on I2, then you can follow from the figure that C has more of both M and N. However, a point on a higher indifference curve may not necessarily have greater amounts of both the goods; but it will have greater quantity of at least one of the two commodities and a greater quantity of any one of the two commodities will render a higher level of utility.
iii. Indifference Curves Can Never Intersect Indifference curves cannot intersect. This follows from the assumptions of transitivity and higher utility at a higher indifference curve.
Let us start with the assumption that indifference curves do intersect; we would check the feasibility of this assumption to prove that indifference curves do not intersect. Suppose I, and I2 are two indifference curves that intersect at point C in Panel “b” of Figure 4.5. Points A and C lie on I2 and points B and C lie on I1; I2 is higher than I1. You can readily infer from the assumption of transitivity that since A and C give same utility’ and B and C give same utility, therefore A and B also give same utility to the consumer. Now since a higher indifference curve represents higher utility; then following the properties of indifference curves, A must be preferred to B. This is nothing but a contradiction! Hence indifference curves can never intersect.
(iv) Convex to the Origin
Indifference curves are convex to the origin, i.e., they are bowed out towards the origin. This is because two goods cannot be perfect substitutes of each other. Therefore as you have more of one commodity, you would like to sacrifice less of the other commodity for an additional unit of the first commodity. The explanation of this property needs an elaboration on another concept, namely that of marginal rate of substitution.
Limitations of Indifference Curve Theory
i. It was assumed that a consumer can rank his preferences. However, it is not always feasible for a consumer to be able to rank his preferences in reality.
ii. The assumption that the consumer is rational has been criticized. It is not possible for the consumer to have complete knowledge about the conditions prevailing in the market.
iii. The indifference curve theory does not contribute anything new. It has just attempted to replace some of the concepts of the cardinal utility theory, for example, marginal utility by marginal rate of substitution.
iv. The indifference curve theory is unable to analyse the consumer’s behaviour in the face of risks and uncertainty.
v. As far as empirical evidence is concerned to support the indifference curve theory, the data available is limited.
Applications of Indifference Curve Theory
i. In making decisions relating to price subsidy as compared with a supplementary income. By using the indifference curve analysis, the government can compare the welfare effects of the two options.
ii. In making decisions relating to food stamps as compared with cash grant. The indifference curve is an effective technique to analyse the impact of a food stamp programme as compared with a cash subsidy by comparing the impact on the welfare of eligible families of the two types of subsidies.
iii. Deriving the supply curve of labour by an individual worker. By combining the indifference curve and the wage line, one can derive the wage offer curve and thus the supply curve of an individual worker.