Principles of Economics/Indifference

Indifference and Preference

People are indifferent to what combination of goods they obtain if the goods give the same combined utility. However, as peoples' preferences differ, their individual indifference curves will differ as well, being weighted more in favor of certain goods. It is this preference that determines who will obtain the scarce goods available in the economy: whoever has the most preference will demand a good the most, even at higher prices, and will be more able to obtain it, whereas those who have only minimal preference will not obtain the good.

Indifference curves

Assuming that both of these goods give marginally positive utility no matter how many of them there are, the indifference curves will appear as above. In actuality, there are an infinite number of such curves. Along each curve, one is indifferent to which combination gets one to that curve. Traversing across curves involves a change of utility obtained, much like traversing a contour map involves a change of altitude. For any one entity (individual, firm, society), indifference curves may not cross.

Budget with indifference curves

With any budget curve, we can find a point at which the highest indifference curve is reached, meaning that the greatest possible utility is obtained. This position is located by the intersection of the two lines.

PPF with indifference curves

Similarly, we can find the optimal point for a PPF. Here, a shift in PPF involves the optimal point changing to a position along a lower-utility indifference curve.