Now let's see how different consumption bundles, different amounts of goods can lead to the same amount of happiness or satisfaction for the consumer, alright? These are going to show us our indifference curves. So we talked about budget constraints and budget constraints show us consumption bundles that we can afford with our income, okay? So we are talking about we have a certain amount of income, what can we buy with that income regardless of how happy that's going to make us. Okay? And indifference curve, it disregards money now. We're not considering how much money things cost. We're just going to think about the satisfaction. Alright? It shows consumption bundles that give the same amount of satisfaction or we use this term in economics, utility for satisfaction. Okay? We're going to define it right down here. Utility, one more time, is the satisfaction or happiness that one receives from the consumption of goods. Okay? So you can imagine this is going to be kind of an abstract topic, right? When we talk about utilities, we're going to talk about the unit of util. The util is the measurement of utility and we use this U to measure it. A U for utility. But let's think about this like it's going to be really hard to quantify how much utility you get from something, right? When you eat a slice of pizza, it's not like you're saying, I'm getting a 150 utils of satisfaction out of this or right? Then we can't really talk about it like that, it's pretty abstract but it does help us in these situations cause we can quantify different levels of happiness or satisfaction based on our consumption, alright? So we've got this utility concept and of course whenever we talk about a new concept, we're gonna talk about marginal of that concept. So we've got marginal utility right here and what is that going to tell us? We should be pretty used to marginal at this point. We're going to see that marginal utility is the additional, right? Marginal being additional, right? What do we get? Additional satisfaction from consuming one more of the good, right? Marginal, that's the whole thing with marginal. We add one more, how much extra satisfaction? How many extra utils am I getting out of this extra consumption? Okay? And what we're gonna see is that utility follows that law of diminishing returns. Right? We've seen diminishing returns before and that's the idea of the more you consume, the less marginal utility you're gonna get. So you can imagine the first slice of pizza you eat, you're going to get tons of utility, thousands of utility from that first slice. The second slice of pizza maybe 500 utility, right? Third slice, 200 and now you're starting to get full, you're not satisfied by the pizza as much. So that utility keeps going down. Right? It keeps decreasing as we eat more and more of the same good. Okay. So we have those diminishing returns. Let's go ahead and see indifference curves on the graph and let's continue with our example of party boy Paul. So party boy Paul gains the same amount of utility from the consumption bundles shown in the table. Graph the indifference curve for PVP's consumption of vodka and beer. So quick note we have to make about utility, there's no way that you could have figured this out, right? There's no way you could have known how much vodka and how much beer gives him a certain level of satisfaction. This kind of information has to be given to you, okay? So let's look at this first table where we have utility of 500, right? Notice, the utility is staying constant. The amount of satisfaction we get from all these different bundles, a, b, c, and d, it's the same. So we would be indifferent if we had 1 vodka and 9 beers or if we had 2 vodkas and 4 beers, 4 vodkas and 2 beers, all of these would provide the same amount of satisfaction, to party boy Paul in this case. So let's start with this first indifference curve, right, where no matter what consumption we do along this curve, it will provide us 500 utils of utility, of satisfaction. So remember, we still got vodka on this axis and the quantity of beer on this axis. Okay. So our graph hasn't changed. Right? We're still showing quantity and quantity on the axes and now we've just got different bundles here. So let's start with bundle a where we have 1 vodka and 9 beers. So 1 vodka and 9 beers is gonna put us somewhere out here. I'm gonna put an A right there. Let's go on to B. So B, we have 2 vodka and 4 beer. So 2 vodkas and 4 beers puts us right around there and that's b. How about C? Bundle C has 4 vodka and 2 beers right here, and finally D has 7 vodka and 1 beer. So 5, 6 this is 7 right here, 1 beer. There we go. These are our points, so that was point C, this is point D. Alright, let's go ahead and connect these points and make our that was pretty good. That's our first indifference curve and this represents all of the possible combinations of vodka and beer that provide 500 utils. Right? So this indifference curve shows us all the combinations where party boy Paul will get 500 utils of satisfaction. Now what about this curve where utility is 750? So he's getting more satisfaction from these bundles, right? So you can imagine if he could pick from because it has more utility, right? He's gonna get more satisfaction out of that bundle, so let's go ahead and mark these in. I'm gonna draw this one in blue. So we've got bundle E with 2 vodka and 9 beer. That's gonna be right here, E. F is gonna have 3 vodka and 5 beer right there and notice these points where they are, they're all further away, right? They're further out from the origin because they're providing more utility, right? So we would imagine we want more, we're gonna consume more to get more utility. That's the idea here. Here. Higher consumption is higher utility. So let's kind of see it continue. So how about 5 vodka and 3 beer and then finally 8 vodka up here. This was 8 and 2 beers. So any of these combinations would provide 750 utils to party boy Paul, right? And anywhere else along the curve also provides that amount of utility. So we just picked out some key points here, but there is a whole curve with all the different utility that Party Boy Paul can get. Man that was pretty good too. So this one is our 750 utils curve right there, right? So that's how we graph our indifference curves and once what we've started to build here is what we call an indifference curve map. Okay. So the indifference curve map, it's basically a collection of indifference curves, so it's going to be a bunch of different indifference curves representing the consumer's utility function, right? We've got different levels of utility and that's based on different levels of consumption. So you can imagine there's more than just these two curves, we just represented 2 situations where he's gonna have 500 utility or 750. But what about a situation where he'd have 600 utility or 800 utility, a 1000 utility, a 100 utility. Right? There's gonna be all these different curves and you could imagine that there would be infinite curves just like this going all the way up and all the way down here. Right? There would be curves everywhere based on different levels of utility and that is the indifference curve map. Alright, so each person is going to have all these different indifference curves based on their joy, the utility that they get from the consumption. Okay? So one last concept here is the marginal rate of substitution. Okay, so this marginal rate of substitution, it's the amount of a good the consumer is willing to give up for 1 unit of the other good. Okay? And when we talk about marginal rate of substitution, the easy way to think about it is it's just the slope of the indifference curve at any point, at whatever point we choose. Okay? So when we do the slope, it can be tricky to find the slope at a point because it's constantly changing compared to a straight line. If we had a straight line, the slope is constant and it would be one number the whole time, but here the slope is changing, right? We see it change and it's steep at the beginning and then it starts to wane and then it becomes very shallow. Right? So if you don't remember, here is our formula for slope where we take the change in Y over the change in X, right? How much did the Y change divided by how much did the X change and you might remember this from algebra as the rise over the run, right? We're going to see how much the up down change, that's the rise and the run is the left or right change. Now with the MRS, marginal rate of substitution, it's always going to be positive. We just want a positive number, right? How many of these units are we giving up for the other, so it's not going to be, you know, whether is it positive or negative, we just want the absolute value, we just want the number. So let's go back to this idea where we were talking about him getting 500 utils, right, the utility the indifference curve for the 500 utils and let's see what the marginal rate of substitution is when he's consuming 7 vodkas. So when he's consuming 7 vodkas, right? How many vodkas is he willing to give up for another beer? If he wants one more beer, well he's currently got one beer, right, when he's got 7 vodkas, but he wants to get over to 2 beers. So what is that marginal rate of substitution? Well, he's gonna give up from 7 down to 4, so he's willing to give up 3 vodkas there for 1 more beer at this point, right? Because he doesn't have that much beer. He only has one beer and he's got a ton of vodka, so you can imagine all those vodka shots it gets a little boring after a while. He wants a beer, clear his throat, chill out a little bit, right? So that beer is very valuable to him at this point because he doesn't have a lot of beer yet. So let's go on and see what that means. So we had a rise, right? Sorry, we had the rise in that situation is this 3, right? We had 3 vodkas less, our change in y is 3, and our change in x is 1, right? The run right here goes from 1 to 2. We have one extra beer. So our rise over run is 3 divided by 1. MRS, marginal rate of substitution, is going to equal 3 in that case, but it's not constant. Remember, we've got a curve. It's going to be changing. So let's see how about when he's consuming 4 vodkas, what is his marginal rate of substitution? So let's do the same thing. Notice so to get from one point to the next, we have to go down by 2 here and over by 2. Right? So we went over by 2 here from one point to the next because it's curved. Right? It doesn't necessarily cross at this point right there. It could be curved and it could be crossing somewhere else, so what we're kind of doing is taking the average slope over this region. So the average slope over this region, this one up here, I'm gonna put the one up here, right? So over this region, we decreased by 2 and we also the rise was 2, and the run was 2 as well. So we're going to have 2 divided by 2 or MRS is equal 2 divided by 2, which is equal to 1. Notice it changed, right? At this point, since we already have some beer, we're less willing to give up vodka, right? We still want to keep some of our vodka, so we would only trade 1 vodka away for one more beer at this point to stay indifferent and keep our satisfaction the same. Now what about when we only have 2 vodkas vodkas behind me here, right? What's going to be the marginal rate of substitution when we're down to just 2 vodkas? You can imagine that he's going to be pretty possessive of these. He doesn't want to give up those vodkas really easily because he's only got a few left, alright? So let's see what happens. When he's in a situation where he's got 2 vodkas here, well, to give up that vodka, right? To give up that vodka, he's gonna have to get 5 beers, right? This is all the way out here is 9, so he'd have to get 5 beers to give up that one vodka at that point. So you could see that it takes a lot once we get to those edges. Just like we saw at the beginning, he was willing to give up a lot of vodka to get a little more beer. Well now he's not willing to give up much vodka because he doesn't have so much left. Alright? So our rise was 1, the rise over run. Right? The rise was 1, the run was 5 in this case and it doesn't matter positive or negative. Remember, we just want the absolute value. We want the number here. So the MRS is going to equal the rise of 1 divided by 5, the run, which is just 1 fifth. So he would only be willing to give up 1 fifth of a vodka for another beer, right? So just to let's put it in words, In this first situation, the idea is that he would be willing to give up 3 vodka for 1 beer. Right? And the same thing for the next ones. In the second box, he'd be willing to give up 1 vodka for 1 beer and then in that final situation, he'd only be willing to give up 1 fifth of a shot of vodka for the next beer. Alright? So that's about it here, let's go ahead and move on to the next video.
Indifference Curves: Videos & Practice Problems
Indifference curves illustrate how different consumption bundles yield the same utility, representing consumer satisfaction. Higher curves indicate greater utility, as more consumption leads to increased satisfaction. These curves are downward sloping and bow inwards, reflecting diminishing marginal utility—where additional units of a good provide less satisfaction. The marginal rate of substitution quantifies how much of one good a consumer is willing to forgo for another, highlighting changing preferences as consumption levels vary. Importantly, indifference curves never intersect, ensuring each level of consumption corresponds to a unique utility level.
Indifference Curves
Video transcript
Properties of Indifference Curves
Video transcript
So now that we've seen what indifference curves are, let's discuss some of the properties of indifference curves. The first property is that higher indifference curves are preferred to lower indifference curves. We saw that the utility was higher as we went further out during our creation of these curves. For example, party boy Paul's utility from these curves showed he received 500 utils from one curve and 750 utils from another curve. If he could choose a point on any of these curves, he'd prefer to be on the 750 utils curve because he gets more satisfaction out of it. The logic here is that people prefer to consume more. The more you consume, the more utility you get. That's some capitalist stuff right there, and don't we love that? Higher indifference curves also result in more consumption, so when we're on a higher indifference curve, we have more consumption and more utility. People want to be on higher indifference curves to get more utility.
The next property is that indifference curves are downward sloping, as observed, and they also bow inwards. Consumers generally like both goods, which is why we're discussing this topic. If the quantity of one good decreases, they will feel discontent due to the reduction in utility, implying that the quantity of the other must increase to balance that loss, maintaining their indifference. This is why indifference curves are downward sloping—when one goes down, the other goes up. Regarding the curves bowing inwards, when consumption of one good is low, we are willing to give up more of the other good. For instance, when you only have one slice of pizza, a second slice brings a lot of satisfaction. However, when you have ten slices, an eleventh slice doesn't bring as much satisfaction. Therefore, the curves will have a pronounced bow inwards near the edges, resulting in steep slopes where the quantity of one good is low.
The last property is that indifference curves never, and I emphasize, NEVER, cross. This is because each curve represents a different level of utility, for instance, one being 500 utils and another 750 utils. If they were to cross, it would imply that at the crossing point, you have both 500 utils and 750 utils simultaneously, which is illogical. An intersecting point where the same level of consumption results in different levels of utility is impossible. Thus, indifference curves will always diverge outwards as shown.
Those are the properties of indifference curves. Let's go ahead and move on to the next video.
Which of the following is true about indifference curves?
At different points along an indifference curve,
If the marginal rate of substitution is equal to 2 at a point on an indifference curve, then the consumer would:
Here’s what students ask on this topic:
What are indifference curves in microeconomics?
Indifference curves in microeconomics represent different combinations of two goods that provide the same level of utility or satisfaction to a consumer. These curves help illustrate consumer preferences and the trade-offs they are willing to make between different goods. Higher indifference curves indicate higher levels of utility, meaning the consumer derives more satisfaction from the combinations of goods on those curves. The curves are typically downward sloping and bow inward, reflecting the principle of diminishing marginal utility, where additional units of a good provide less additional satisfaction.
Created using AIWhy do indifference curves never intersect?
Indifference curves never intersect because each curve represents a different level of utility. If two curves were to intersect, it would imply that the same combination of goods provides two different levels of utility simultaneously, which is impossible. This would violate the basic principle that each consumption bundle corresponds to a unique level of satisfaction. Therefore, indifference curves are always distinct and separate, ensuring that each level of consumption is associated with a specific utility level.
Created using AIWhat is the marginal rate of substitution (MRS) in the context of indifference curves?
The marginal rate of substitution (MRS) is the rate at which a consumer is willing to give up one good in exchange for another while maintaining the same level of utility. It is represented by the slope of the indifference curve at any given point. Mathematically, it is the ratio of the marginal utility of one good to the marginal utility of another. The MRS changes along the curve, reflecting the consumer's changing willingness to substitute one good for another as their consumption levels vary.
Created using AIWhat are the properties of indifference curves?
Indifference curves have several key properties: 1) Higher indifference curves represent higher utility levels, indicating greater satisfaction. 2) They are downward sloping, meaning that as the quantity of one good decreases, the quantity of the other good must increase to maintain the same utility. 3) Indifference curves bow inward due to diminishing marginal utility, where additional units of a good provide less additional satisfaction. 4) Indifference curves never intersect, ensuring that each combination of goods corresponds to a unique level of utility.
Created using AIHow do budget constraints interact with indifference curves?
Budget constraints represent the combinations of goods a consumer can afford given their income and the prices of the goods. When combined with indifference curves, they help determine the optimal consumption bundle. The point where the budget constraint is tangent to the highest possible indifference curve represents the consumer's optimal choice, maximizing their utility given their budget. This tangency point indicates the best trade-off between the two goods that the consumer can afford while achieving the highest possible satisfaction.
Created using AI