Indifference CurvesLocus of points representing different

bundles of two goods, each of which yields the same level of total utility.

It is a graphical representation.

Conveys consumer’s indifference between various choices.

Negatively sloped & convex in shape.

Typical Indifference Curve

Indifference Map

Quanti

ty o

f Y

Quantity of X

I

II

III

IV

Marginal Rate of SubstitutionMRS shows the rate at which one good

can be substituted for another while keeping utility constantMeasures slope of the indifference curve

Diminishes along the indifference curve as X increases & Y decreases( due to diminishing marginal utility)

Ratio of the marginal utilities of the goods

X

Y

MUYMRS

X MU

Marginal UtilityAddition to total utility attributable to the

addition of one unit of a good to the current rate of consumption, holding constant the amounts of all other goods consumed.

The Last Rupee spent on each commodity is the same.

The Marginal utility falls as consumption increases.

MU U X

Utility MaximisationUtility maximisation subject to a limited

money income occurs at the combination of goods for which the indifference curve is just tangent to the budget line

X X

Y Y

MU PYMRS

X MU P

Conditions for Consumer EquilibriumMRS = Ratio of Prices

The prices of the commodities on offer matches the consumer’s willing to pay.

MRS continuously falls due to diminishing marginal utility.

Equilibrium is achieved where the budget line is tangent to the indifference curve.

X X

Y Y

MU PYMRS

X MU P