Consumer Behavior and Indifference Curves

How consumers use their income to buy goods to get the most satisfaction

Individual or household using a good or service; rational, making utility-maximizing decisions with limited income and information

Specific combination of goods a consumer wants to consume; often depicted with x1, x2 for two goods

A consumer's goal to get the most satisfaction possible from their budget of goods

Sum of the demands of all individual consumers for a good

All possible combinations of goods and services a consumer can afford

Items that can be part of a consumption bundle, represented as x1, x2, ..., xn

A consumer that acts in a logical way to meet their needs and wants with the resources they have.

Goods where the consumer is equally satisfied consuming either good. The marginal rate of substitution (MRS) is constant.

A curve showing all consumption bundles that yield the same level of satisfaction for a consumer who considers two goods perfect substitutes.

Goods that are consumed together in fixed proportions. The consumer gets no extra satisfaction from more of one good without the other.

A curve showing all consumption bundles that give the same level of satisfaction to a consumer who needs goods in a fixed ratio.

The rate at which a consumer is willing to trade one good for another while maintaining the same level of satisfaction.

A good the consumer neither gains nor loses satisfaction from consuming.

Different preferences will make indifference curves have different shapes, which reflects the willingness to substitute one good for another.

Goods consumed in specific quantities relative to each other. For example, a consumer needs two items of a single pair, one of each item.

An increase in the price of Good 1 leads to a steeper and inward-rotating budget line, reducing the maximum amount of Good 1 that can be purchased.

A decrease in the price of Good 2 makes the budget line flatter and outward-rotating, potentially increasing the maximum amount of Good 2 that can be purchased.

The point on a budget line where maximum consumption of one good can be obtained (assuming zero consumption of other good).

The point on a budget line where maximum consumption of another good can be obtained (assuming zero consumption of first good).

The slope of the budget line represents the relative price of two goods. A steeper slope means the cost of one good is higher relative to the other

An increase in the price of Good 2 leads to a flatter and inward-rotating budget line, diminishing the maximum amount of Good 2.

A change in the price of one good while holding income and the other good's price constant leads to a rotation of the budget line.

Consumer's financial capacity to afford goods, fixed in this context for analysis of price changes on budget lines.

When the prices of both goods increase by the same factor, the budget line shifts inward, indicating a smaller attainable consumption set.

If both prices of goods decrease by the same factor, the budget line shifts outward, allowing the consumer to purchase more of both goods.

Changes in relative prices (one good's price increasing more than the other) affect the slope of the budget line. A steeper slope means the good with the larger price increase is relatively more expensive.

A quantity tax levied on a good effectively increases its price for the consumer, shifting the budget line inward and reducing the attainable consumption set.

If income and both prices increase by the same factor, the budget line remains unchanged. The consumer's overall purchasing power remains the same.

A decrease in income shifts the budget line inward, reducing the consumer's ability to purchase goods.

If the prices of two goods increase at different rates, the budget line shifts in a way that reflects the relative price changes.

If prices of two goods decrease at different rates, the budget line shifts outward, but the slope changes reflecting the relative price changes.

A theory that infers a person's preferences by observing their choices in the marketplace.

The assumption that consumers make logically sound decisions when choosing between goods.

If a consumer prefers Good A to Good B, and Good B to Good C, then they must also prefer Good A to Good C.

A measure of utility that allows for comparisons of the intensity of preference between different bundles of goods.

A measure of utility that only ranks preferences between different bundles of goods, not their intensity.

The assumption that consumers make consistent choices based on their preferences, meaning if they prefer A over B today, they'll prefer the same in the future.

The statement that if a consumer chooses one bundle of goods over another, given the same budget, then they must prefer the chosen bundle.

The extra satisfaction a consumer gets from consuming one more unit of a good.

The MRS of good 1 for good 2 is calculated by dividing the marginal utility of good 1 (MUx1) by the marginal utility of good 2 (MUx2).

To find the marginal utility of a good (MUx1 or MUx2), differentiate the utility function (u(x1, x2)) with respect to that good.

A change in the utility function that preserves the original preferences. It doesn't change the shape of indifference curves.

A mathematical equation that represents a consumer's preferences for different combinations of goods.

A curve that shows all the combinations of goods that give a consumer the same level of satisfaction (utility).

To draw indifference curves from u(x1, x2), set the utility function equal to a constant and plot the points that satisfy the equation. Each constant represents a different indifference curve.