The indifference curve is a graph that shows the different combinations between two goods that report the same satisfaction to a person, and that are preferred to other combinations.
When two options are reached that are indifferent to the individual, these two points that represent them are in the same indifference curve. If you move along the curve in one direction, you are willing to accept more pens in exchange for fewer pencils; and if he moves in the other direction, he is willing to accept more pencils and fewer pens. But any point within that curve, reports the same level of satisfaction.
The curve to which we refer reflects, neither more nor less, preferences between pairs of goods and has no relation to money or prices. Moreover, along the indifference curve each point has a different monetary value, but the degree of satisfaction is identical.
Graphical representation of indifference curves
It is drawn simply by asking an individual which combination of goods he prefers, for example: 10 pens and 5 pencils; 15 pens and 3 pencils; or 20 pens and 2 pencils. This individual is indifferent to any of these three options. Note that, as one option increases, the other decreases. And given that when we have much of one and little of another, we will appreciate more the less we have (with a normal good). Following the example, if we start from the first basket (5 pencils and 10 pens), to get 5 more pens this individual will need 2 pencils. But in the next step, since he only has 3 pencils left, if we want him to remain indifferent, he must be given 5 pens for a pencil.
Likewise, if the individual has the option of increasing the number of pens without decreasing the number of pencils it means that he is now in a new indifference curve, which reports more utility than the previous one. That is why it is shown that infinite indifference curves can be drawn by forming what is known as the indifference curve map.
On the other hand, the slope of the indifference curve measures the number of pens the individual is willing to give up to get another pencil. The technical term of this slope is the marginal rate of substitution, which indicates the amount of a good that the individual wants to do without in exchange for one more unit of the other.
This ratio increases or decreases depending on the amount of good that the consumer already has. As as we move along the indifference curve we increase the amount of one of the goods, a smaller amount of the other good is increasingly necessary to compensate for the change; This is why the slope of the curve becomes increasingly flat. This is what is known as marginal ratio of diminishing substitution.
In this sense, we must not forget that the goods of a consumer are limited by their income or, what is the same, they are subject to a budgetary restriction. In principle, the consumer can spend all his money on pens or pencils. But the slope of this budget constraint measures the speed at which that consumer can compensate one good for another, and is given by the relative prices of both goods. That is, the budget constraint is determined both by the income of the consumer and by the relative prices of the goods.