Econ Lab · Consumers
Preferences and indifference curves
Picture a morning where you split your drinks between coffee and tea. Some mixes leave you exactly as content as others. Three coffees and a lot of tea can feel just as good as a tea-light morning swimming in coffee. Join up every mix that feels the same and you get an indifference curve.
Drag the dot along the middle curve. The bundle changes but your happiness does not, and the slope tells you the rate at which you are willing to swap.
Each curve links bundles you enjoy equally, and curves further from the origin are better. The slope at your bundle is the marginal rate of substitution, the tea you will trade for one more coffee while staying just as happy.
You are coffee-poor and tea-rich here, with only coffee against tea. The curve is steep, so the rate is high at about cups of tea per coffee. When coffee is scarce, one more cup is worth a lot, so you will give up plenty of tea to get it.
Drag the dot along the middle curve, or use the slider. Curves further from the corner are preferred.
One curve, equal happiness
A single indifference curve collects every coffee-and-tea bundle that leaves you equally satisfied. Move along it and you gain one drink while giving up some of the other, and the two changes cancel out. We score happiness with a simple utility function.
Fix the score at some level and the bundles that earn it trace out the curve .
Higher curves are better
The figure shows three curves, for utility levels six, nine, and twelve. They never cross. The one further from the corner sits on more of both drinks, so it is plainly preferred. Whole families of these curves stack up like contour lines on a map, each one a higher rung of satisfaction than the last.
The slope is a trade rate
The steepness of the curve at any bundle is the marginal rate of substitution, the tea you will surrender for one more coffee while staying just as happy. For this utility it has a clean form.
Drag the dot toward more coffee and the curve flattens. When coffee is scarce you guard each cup and demand a lot of tea to part with one. Once you are swimming in coffee, another cup is worth little tea to you.
What you just did
You read a consumer's whole ranking off a picture. The curves say what is equally good, their stacking says what is better, and their slope says how willing you are to trade. Put a budget on top of this and the best affordable bundle sits where a budget line just grazes the highest curve it can reach. That is the next step.