Preferences and Indifference Curves

Economists describe what a consumer wants using preferences: a ranking of the bundles of goods a person could choose. An indifference curve turns those preferences into a picture, joining all the bundles of two goods that give the consumer the same level of satisfaction.

Every point on a single curve gives equal satisfaction, so the consumer is “indifferent” between them. Curves have three key features: they slope downward (more of one good means less of the other for the same satisfaction), they are convex to the origin, and a curve farther from the origin represents more preferred bundles.

The slope of an indifference curve is the marginal rate of substitution (MRS): how much of good Y a consumer will give up for one more unit of good X while staying equally satisfied. Because the curve is convex, the MRS diminishes as you move along it.

Preferences describe what a consumer wants; what they can afford is set by the budget line. The best affordable choice is where an indifference curve just touches that line, which leads into the consumer's optimal choice.

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