Can indifference curves be straight

In case of perfect substitutes, the indifference curves are parallel straight lines because the consumer equally prefers the two goods and is willing to exchange one good for the other at a constant rate. As one moves along a straight-line indifference curve of perfect substitutes, marginal rate of substitution of one good for another remains constant. Examples of goods that are perfect substitutes are not difficult to find in the real world. For example, Dalda and Rath Vanaspati, two different brands of cold drink such as Pepsi Cola and Coca Cola are generally considered to be perfect substitutes of each other.

The greater the fall in marginal rate of substitution, the greater the convexity of the indifference curve. The less the ease with which two goods can be substituted for each other, the greater will be the fall in the marginal rate of substitution. At the extreme, when two goods cannot at all be substituted for each other, that is, when the two goods are perfect complementary goods, as for example gasoline and coolant in a car, the indifference curve will consist of two straight lines with a right angle bent which is convex to the origin as shown in Fig.

Perfect complementary goods are used in a certain fixed ratio. As will be seen in Fig. All this means that the two perfect complements are used in a certain fixed ratio and cannot be substituted for each other In Fig. Complements are thus those goods which are used jointly in consumption so that their consumption increases or decreases simultaneously. Pen and ink, right shoe and left shoe, automobile and petrol sauce and hamburger, type writer and typists are some examples of perfect complements.

Article Shared by. Related Articles. We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits.

Do not sell my personal information. Cookie Settings Accept. Manage consent. Close Privacy Overview This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website.

We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience. Necessary Necessary. Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously. The cookie is used to store the user consent for the cookies in the category "Analytics".

Given the definition of an indifference curve—that all the points on the curve have the same level of utility—if point F on indifference curve Uh is preferred to point B on indifference curve Um, then it must be true that all points on indifference curve Uh have a higher level of utility than all points on Um.

More generally, for any point on a lower indifference curve, like Ul, you can identify a point on a higher indifference curve like Um or Uh that has a higher consumption of both goods. Since one point on the higher indifference curve is preferred to one point on the lower curve, and since all the points on a given indifference curve have the same level of utility, it must be true that all points on higher indifference curves have greater utility than all points on lower indifference curves.

These arguments about the shapes of indifference curves and about higher or lower levels of utility do not require any numerical estimates of utility, either by the individual or by anyone else. They are only based on the assumptions that when people have less of one good they need more of another good to make up for it, if they are keeping the same level of utility, and that as people have more of a good, the marginal utility they receive from additional units of that good will diminish.

Given these gentle assumptions, a field of indifference curves can be mapped out to describe the preferences of any individual. Each person determines their own preferences and utility. Thus, while indifference curves have the same general shape—they slope down, and the slope is steeper on the left and flatter on the right—the specific shape of indifference curves can be different for every person.

Indifference curves for other people would probably travel through different points. People seek the highest level of utility, which means that they wish to be on the highest possible indifference curve.

However, people are limited by their budget constraints, which show what tradeoffs are actually possible. This information provides the basis for the budget line shown in Figure 2. Along with the budget line are shown the three indifference curves from Figure 1.

Several possibilities are identified in the diagram. The choice of F with five books and doughnuts is highly desirable, since it is on the highest indifference curve Uh of those shown in the diagram.

Choices B and G are both on the opportunity set. However, choice G of six books and 48 doughnuts is on lower indifference curve Ul than choice B of three books and 84 doughnuts, which is on the indifference curve Um. If Lilly were to start at choice G, and then thought about whether the marginal utility she was deriving from doughnuts and books, she would decide that some additional doughnuts and fewer books would make her happier—which would cause her to move toward her preferred choice B.

The highest achievable indifference curve touches the opportunity set at a single point of tangency. Since an infinite number of indifference curves exist, even if only a few of them are drawn on any given diagram, there will always exist one indifference curve that touches the budget line at a single point of tangency.

All higher indifference curves, like Uh, will be completely above the budget line and, although the choices on that indifference curve would provide higher utility, they are not affordable given the budget set. All lower indifference curves, like Ul, will cross the budget line in two separate places. When one indifference curve crosses the budget line in two places, however, there will be another, higher, attainable indifference curve sitting above it that touches the budget line at only one point of tangency.

A rise in income causes the budget constraint to shift to the right. In graphical terms, the new budget constraint will now be tangent to a higher indifference curve, representing a higher level of utility. A reduction in income will cause the budget constraint to shift to the left, which will cause it to be tangent to a lower indifference curve, representing a reduced level of utility.

Or will the quantity of one good rise substantially, while the quantity of the other good rises only a little, or even declines? Since personal preferences and the shape of indifference curves are different for each individual, the response to changes in income will be different, too. For example, consider the preferences of Manuel and Natasha in Figure 3 a and Figure 3 b. Thus, they face identical budget constraints. In this way, the indifference curve approach allows for a range of possible responses.

However, if both goods are normal goods, then the typical response to a higher level of income will be to purchase more of them—although exactly how much more is a matter of personal preference. If one of the goods is an inferior good, the response to a higher level of income will be to purchase less of it. A higher price for a good will cause the budget constraint to shift to the left, so that it is tangent to a lower indifference curve representing a reduced level of utility.

Conversely, a lower price for a good will cause the opportunity set to shift to the right, so that it is tangent to a higher indifference curve representing an increased level of utility. Exactly how much a change in price will lead to the quantity demanded of each good will depend on personal preferences.

Anyone who faces a change in price will experience two interlinked motivations: a substitution effect and an income effect. The substitution effect is that when a good becomes more expensive, people seek out substitutes. If oranges become more expensive, fruit-lovers scale back on oranges and eat more apples, grapefruit, or raisins.

Conversely, when a good becomes cheaper, people substitute toward consuming more. If oranges get cheaper, people fire up their juicing machines and ease off on other fruits and foods. If the price of a good that you have been buying falls, then in effect your buying power has risen—you are able to purchase more goods. Conversely, if the price of a good that you have been buying rises, then the buying power of a given amount of income is diminished. Instead, it refers to the situation in which the price of a good changes, and thus the quantities of goods that can be purchased with a fixed amount of income change.

Whenever a price changes, consumers feel the pull of both substitution and income effects at the same time. Using indifference curves, you can illustrate the substitution and income effects on a graph. In Figure 4 , Ogden faces a choice between two goods: haircuts or personal pizzas. Ogden starts at choice A on the higher opportunity set and the higher indifference curve.

After the price of pizza increases, he chooses B on the lower opportunity set and the lower indifference curve. Point B with two haircuts and 10 personal pizzas is immediately below point A with three haircuts and 10 personal pizzas, showing that Ogden reacted to a higher price of haircuts by cutting back only on haircuts, while leaving his consumption of pizza unchanged.

The dashed line in the diagram, and point C, are used to separate the substitution effect and the income effect. To understand their function, start by thinking about the substitution effect with this question: How would Ogden change his consumption if the relative prices of the two goods changed, but this change in relative prices did not affect his utility?

The slope of the budget constraint is determined by the relative price of the two goods; thus, the slope of the original budget line is determined by the original relative prices, while the slope of the new budget line is determined by the new relative prices. With this thought in mind, the dashed line is a graphical tool inserted in a specific way: It is inserted so that it is parallel with the new budget constraint, so it reflects the new relative prices, but it is tangent to the original indifference curve, so it reflects the original level of utility or buying power.

Thus, the movement from the original choice A to point C is a substitution effect; it shows the choice that Ogden would make if relative prices shifted as shown by the different slope between the original budget set and the dashed line but if buying power did not shift as shown by being tangent to the original indifference curve.

The income effect is the movement from point C to B, which shows how Ogden reacts to a reduction in his buying power from the higher indifference curve to the lower indifference curve, but holding constant the relative prices because the dashed line has the same slope as the new budget constraint.

In this case, where the price of one good increases, buying power is reduced, so the income effect means that consumption of both goods should fall if they are both normal goods, which it is reasonable to assume unless there is reason to believe otherwise. Now, put the substitution and income effects together. When the price of pizza increased, Ogden consumed less of it, for two reasons shown in the exhibit: the substitution effect of the higher price led him to consume less and the income effect of the higher price also led him to consume less.

However, when the price of pizza increased, Ogden consumed the same quantity of haircuts. The substitution effect of a higher price for pizza meant that haircuts became relatively less expensive compared to pizza , and this factor, taken alone, would have encouraged Ogden to consume more haircuts. However, the income effect of a higher price for pizza meant that he wished to consume less of both goods, and this factor, taken alone, would have encouraged Ogden to consume fewer haircuts.

The size of these income and substitution effects will differ from person to person, depending on individual preferences. This case would be drawn on the graph so that the point of tangency between the new budget constraint and the relevant indifference curve occurred below point B and to the right.

Conversely, if the substitution effect away from pizza and toward haircuts is not as strong, and the income effect on is relatively stronger, then Ogden will be more likely to react to the higher price of pizza by consuming less of both goods. In this case, his optimal choice after the price change will be above and to the left of choice B on the new budget constraint.

And so this is a case of perfect substitutes. So another indifference curve might look something like this. But it's always going to have a slope of negative 1. But the slope would be the exact same thing. Now the last situation I want to think about is what we'll call perfect complements. So goods that if you have one of them, you really need the other one.

Otherwise, one of the two is somewhat useful. And maybe the most pure version of perfect complements-- let me write it over here. So let's say this is the quantity of right shoes. And this is the quantity of left shoes. So obviously, if we're talking about just one pair, you have one of each. Now, do you care if you really get more left shoes? You have the exact same preference.

It doesn't really change your life. You have the same total utility. In fact, it might even be negative because you have to store them all. But let's just assume you have the same total utility and you don't get any benefit of having those spare shoes in case your shoe gets destroyed or anything like that. In terms of what you can get out it, what you can wear, you get the same utility.

And so you're really indifferent no matter how many extra left shoes someone gives you. And you'd also be indifferent no matter how many extra right shoes someone gives you. Now, you would be happier if you had maybe two right shoes and two left shoes because now you have two pairs. So this would be another indifference curve. And once again, if you have two right shoes, you really don't care how many more than two left shoes you get.