Overview
This lecture introduces the concept of indifference curves, demonstrating how preferences and trade-offs between two goods are represented, and explains key properties and exceptions.
Preferences and Utility
- Choices are influenced by income, prices, and personal preferences (tastes).
- Utility refers to the satisfaction or happiness gained from consuming goods.
- More of a good generally increases utility; less reduces it.
- Preferred combinations contain more of at least one good.
- Combinations with less of at least one good are less preferred.
Indifference Curves and Maps
- Indifference curve: connects combinations of two goods that give equal utility (leaves you indifferent).
- Points on the same indifference curve yield the same satisfaction.
- Indifference map: a set of multiple indifference curves showing different utility levels.
Marginal Rate of Substitution (MRS)
- The slope of the indifference curve is called the marginal rate of substitution (MRS).
- MRS shows how many units of one good you are willing to give up for an extra unit of another good.
- As you obtain more of one good, the MRS decreases because its marginal utility declines.
- The indifference curve bows inward due to diminishing MRS.
Special Cases: Substitutes and Complements
- Perfect substitutes: indifference curves are straight lines; MRS is constant.
- Perfect complements: indifference curves are right angles; goods must be consumed together in fixed ratios.
Properties of Indifference Curves
- Indifference curves slope downward; more of one requires less of the other to keep utility constant.
- Indifference curves farther from the origin represent higher utility if goods are desirable.
- For "bads" (undesirables), closer curves to the origin are preferred.
- Indifference curves never intersect; crossing would defy logical utility ranking.
Key Terms & Definitions
- Utility — satisfaction received from consuming goods.
- Indifference curve — line showing all combinations of goods with equal utility.
- Marginal rate of substitution (MRS) — rate at which you are willing to trade one good for another while maintaining the same utility.
- Perfect substitutes — goods easily replaceable for one another; constant MRS.
- Perfect complements — goods consumed together in fixed proportions; right-angled indifference curves.
Action Items / Next Steps
- Practice with quick questions provided after the video.
- Prepare for the next lecture on constrained choices (income and price effects).