Indifference Curve Analysis: An Alternative Approach to Understanding Consumer Choice
Read this section to learn about indifference analysis. Attempt the "Try It” problems at the end of the section before checking your answers.
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.