The Convexity of the Indifference Curve and the Marginal Rate of Substitution

People always face trade-offs. If you have more of one good, then you can only have less of another. The shape of an indifference curve describes how a consumer is willing to substitute one good for another.

Marginal Rate of Substitution or MRS is used to quantify the amount of one good that a consumer will give up to obtain more of another. The slope of the IC is nothing but the marginal rate of substitution. Thus the MRS at any point is equal in magnitude to the slope of the indifference curve. the MRS or the slope falls as we move down the indifference curve. This decline in the MRS reflects an important characteristic of consumer preferences.

This is the reason for the convex shape of the IC. It is due to the declining marginal rate of substitution. Another way of describing this principle is that the consumers generally prefer balanced market baskets.