Indifference curve

The expression in a graph of a utility function, where the horizontal axis measures risk and the vertical axis measures expected return. The curve connects all portfolios with the same utility.

Indifference Curve

A curve on a graph where the x-axis represents a quantity of one good and the y-axis represents a quantity of a second good where the curve represents the universe of quantities with the same utility for a rational investor. The indifference curve is convex, or roughly U-shaped.

Fig. 91 Indifference curve. A combination of OA units of product X, and OB units of product Y, yields exactly as much satisfaction to the consumer as does the combination of OC units of product X and OD units of product Y.

Indifference curves always slope downwards because, rationally, consumers will always prefer more of both products and so would not be indifferent between two combinations of products where one combination offers more of both. Specifically, they would only give up one product if they receive more of another for it, being indifferent as between combination E, which offers a lot of product X and little of product Y, and combination F which offers less product X and more product Y (see ECONOMIC MAN).

indifference curve

a curve showing alternative combinations of two products, each of which gives the same UTILITY, or satisfaction. See Fig. 91 . Indifference curves are used (along with BUDGET LINES) to determine a consumer's equilibrium purchases of two products and to analyse the effect of changes in the relative prices of these two products upon quantities demanded (see PRICE EFFECT). See CONSUMER EQUILIBRIUM, INDIFFERENCE MAP.

Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005

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References in periodicals archive

The optimal portfolio should be the tangency portfolio between the EF and the highest indifference curve or, in other words, the efficient portfolio with maximum expected utility.

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For example, we can see China's rapid growth has benefitted society unevenly, as the indifference curve become much steeper over time (Chart 3).

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Figure 4 plots indifference curves in (b, q) space along with the zero-profit pricing function; the optimal amount of borrowing and the resulting price lies where the highest indifference curve intersects this zero-profit curve.

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Research methods in this study include the indifference curve, efficient frontier, and Data Envelopment Analysis (DEA).

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Panel A of figure 1 illustrates this trade-off with a familiar indifference curve budget-set diagram.

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But in practice, the value function is usually unknown and we cannot characterize the indifference curve precisely and we have to estimate it.

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