Cambridge International as and a level Economics Ebook

indiff erence curves
.
Indiff erence curve: 
this shows the diff erent combinations 
of two goods that give a consumer equal satisfaction.
KEY TERM
As the name suggests, an indiff erence curve shows 
the diff erent combinations of two goods that give the 
consumer equal satisfaction. 
Figure 7.2
 shows two such 
indiff erence curves out of the many that can apply to a 
particular consumer. Considering indiff erence curve I
1
, 
the consumer is indiff erent with respect to combinations 
X
, 
Y
or 
Z
since each are on the same indiff erence curve. 
If the consumer moves from point 
Z
to 
Y
, then the 
consumption of good B falls at the expense of an increase 
in consumption of good A. Point 
Y
though still represents 
a situation where the consumer is still equally happy with 
the combination of goods that are being consumed.
Th
e slope of the indiff erence curve is important – it 
represents the extent to which the consumer is willing to 
substitute one good for another. Looking at 
Figure 7.2
, 
both the curves slope more steeply from left to right 
showing that when consuming large amounts of good A, 
the consumer is willing to give up rather more of this good 
when consumption of good B is small. Th
e rate at which 
the consumer is willing to substitute one good for another 
in this way is known as the 
marginal rate of substitution
.
Marginal rate of substitution: 
the rate at which a 
consumer is willing to substitute one good for another.
KEY TERM
Other points to note are:
■
Higher 
indiff erence curves represent higher levels of 
consumption. Consumers therefore prefer to be on a higher 
rather than a lower indiff erence curve.
■
All 
indiff erence curves are downward sloping to indicate that 
a fall in the quantity consumed of one good is accompanied 
by an increase in consumption of the other good.
■
Indiff erence curves cannot cross.
■
Indiff erence curves are concave or bowed inward to 
the origin.