Indifference Curve

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
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
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 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
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
Equilibrium point for an indifference curve
marginal utility product A/ price product A = marginal utility product B/ price product B
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
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