An indifference curve is a graphical representation of an indifference schedule showing various combinations of any two goods representing the same level of satisfaction to the consumer.
It is based on the following assumptions:
- The consumer is rational.
- Ordinal measurement of utility.
- The consumer has non-satiety nature.
- There is the operation of the law of diminishing marginal rate of substitution between two goods under consideration.
- Consistent in consumer’s choice.
- There is transitivity in choice.
Based on the above assumptions, indifference curve can be derived with the help of following hypothetical indifference schedule and figure;
In the above figure, units of x are measured along the x-axis, and units of y are measured along the y-axis respectively. Combination A represents 1 unit of x and 12 units of y. Likewise, combination B consists of 2 units of x and 8 units of y. Similarly, C consists of 3 units of x and 5 units of y. Furthermore, combination D consists of 4 units of x and 3 units of y. Lastly, combination E, 5 units of x and 2 units of y commodity. In the figure, there are altogether five combinations of commodities. These five combinations of commodities ‘ABCDE’ forms an indifference curve ‘AE’.