Understanding Indifference Curves and How to Plot Them

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In order to understand the highs and lows of production or consumption of goods or services, one can use an indifference curve to demonstrate consumer or producer preferences within the limitations of a budget. 

Indifference curves represent a series of scenarios wherein factors like worker productivity or consumer demand is matched against different economic goods, services, or productions, between which an individual in the market would theoretically be indifferent regardless of which scenario he or she takes part.

It is important in constructing an indifference curve to first understand the factors that vary in any given curve and how those affect the indifference of the consumer in that given scenario. Indifference curves operate on a variety of assumptions, including that no two indifference curves ever intersect and that the curve is convex to its origin.

Understanding the Mechanics of Indifference Curves

Essentially, indifference curves exist in economics to determine the best choice of goods or services for a consumer given that particular consumer's income and investment capital, wherein the optimal point on an indifference curve is where it correlates with the consumer's budget restraints.

Indifference curves also rely on other core principles of microeconomics including individual choice, marginal utility theory, income and substitution effects, and the subjective theory of value, according to Investopedia, where all other means remain stable unless charted on an indifference curve themselves.

This reliance on core principles allows for the curve to truly express the levels of satisfaction of a consumer for any good, or the level of production for a producer, within a given budget, but again must also take into account that they could be oversimplifying a market's demand for a good or service; the results of an indifference curve should not be taken as a direct reflection of the real demand for that good or service.

Constructing an Indifference Curve

Indifference curves are plotted on a graph according to a system of equations, and according to Investopedia, "Standard indifference curve analysis operates on a simple two-dimensional graph. One kind of economic good is placed on each axis. Indifference curves are drawn based on the consumer's presumed indifference. If more resources become available, or if the consumer's income rises, higher indifference curves are possible – or curves that are farther away from the origin."

That means that when constructing an indifference curve map, one must place one good on the X-axis and one on the Y-axis, with the curve representing indifference for the consumer wherein any points that fall above this curve would be optimal while those below would be inferior and the entire graph exists within the confines of the consumer's ability (income) to purchase those goods.

In order to construct these, one must simply input a set of data — for instance, a consumer's satisfaction with getting x-number of toy cars and x-number of toy soldiers while shopping — across this moving graph, determining the points by what is available for purchase given the consumer's income.