Indifference Curve Analysis: An Alternative Approach to Understanding Consumer Choice
7. Key Takeaways
- A budget line shows combinations of two goods a consumer is able to consume, given a budget constraint.
- An indifference curve shows combinations of two goods that yield equal satisfaction.
- To maximize utility, a consumer chooses a combination of two goods at which an indifference curve is tangent to the budget line.
- At the utility-maximizing solution, the consumer's marginal rate of substitution (the absolute value of the slope of the indifference curve) is equal to the price ratio of the two goods.
- We can derive a demand curve from an indifference map by observing the quantity of the good consumed at different prices.