Indifference Curve

Equilibrium point for an indifference curve

marginal utility product A/ price product A = marginal utility product B/ price product B

Indifference Map

A graphical representation of a consumer's tastes Each curve reflects a different level of utility Curves farther from the origin represent greater consumption levels and, therefore, higher levels of utility Indifference curves in a consumer's indifference map don't intersect

Properties of Indifference Curves

A particular indifference curve reflects a constant level of utility, so the consumer is indifferent among all consumption combinations along a given curve. Combinations are equally attractive. If total utility is to remain constant, an increase in the consumption of one good must be offset by a decrease in the consumption of the other good, so each indifference curve slopes downward to the right Because of the law of diminishing marginal rate of substitution, indifference curves bow in toward the origin. Higher indifference curves represent higher levels of utility. Indifference curves do not intersect

Income Effect and Indifference Curves

As a result of a drop in price, the income effect is observable by a shift in the indifference curve

Substitution Effect and Indifference Curves

As a result of a drop in price, the substitution effect is observable by a movement along the indifference curve

Marginal Rate of Substiution

Between product A and product B indicates the amount of product B that you are willing to give up to get one more of product B, neither gaining nor losing utility in the process Mathematically, the MRS is equal to the absolute value of the slope of the indifference curve. Recall that the slope of any line is the vertical change between two points on the line divided by the corresponding horizontal change

Budget Line

Depicts all possible combinations of product A and product B, given their prices and your budget

Relationship between indifference curve and the budget line

Indifference curve indicates what you are willing to buy The budget line shows what you are able to buy We must therefore bring together the indifference curve and the budget line to find out what quantities of each good you are both willing and able to buy The budget line is tangent to an indifference curve

Law of diminishing rate of marginal substitution

Says that as your consumption of product A increases, the amount of product B that you are willing to give up to get an additional unit of product A declines

Indifference Curve

Shows all combinations of goods that provide the consumer with the same satisfaction, or the same utility. The consumer finds all combinations on a curve equally preferred Because each bundle of goods yields the same level of utility, the consumer is indifferent about which combination is actually consumed Combinations of goods along an indifference curve reflect some constant, though unspecified, level of utility Inverse relationship - for you to remain indifferent among consumption alternatives, the increase in utility from product A must just offset the decrease in utility from product B → indifference curves slope downward to the right Indifference curves are also convex to the origin, which means they are bowed inward toward the origin