INDIFFERENCE CURVES

Warm-up Question

What do dating and marriage have to do with economics? Scarcity Choice Utility maximization

Economics and Marriage

A market is any mechanism or institution that brings buyers together with sellers

Economists model markets 95% of Americans marry, so most of us

become buyers and sellers of marital partners at some point The marriage market is simply the

mechanism that brings us together

Marriage and Economics

What can be gained from marriage? Are these gains more or less certain than

a salary?

Marriage and Economics

“The estimation of unknown qualities is central to the search for a spouse.”

Utility

Utility The level of happiness or satisfaction that

someone experiences from buying a good or service

Utility is represented on a graph in an indifference curve

The Indifference Curve

The indifference curve is economists’ answer to the age-old question:

What makes buyers happy, and how can we measure that happiness?

An indifference curve is how economists explain preferences

Consumption Bundles

We call the objects of consumer choice “consumption bundles”

Individuals derive satisfaction or utility by consuming bundles of products

Consumption Bundles

A consumption bundle consists of multiple goods between which the consumer is indifferent At each point on the curve, the consumer

has no preference for one bundle over another

The Indifference Curve…

An indifference curve represents all the different combinations of two goods that generate the same level of utility

The Indifference Curve…

What does that mean in plain English? Each point on an

indifference curve represents a combination of goods

All points on one indifference curve give the person the exact same amount of happiness

An indifference curve is mainly used to represent observable demand patterns for individual consumers

For example…

Indifference Curves

Notice how indifference curves bow in towards the origin

The Bachelor & Indifference Curves Markets can exist anywhere Although money may not be involved,

almost everything has a price

The Bachelor & Indifference Curves “Marital searchers look to the wealth of

information that is embodied in prices. Although marital searchers have imperfect information about themselves as well as their suitors, they are the best assessors of their own aspirations and potential, and they use this knowledge to set standards for courtship and marital offers. Searchers use these standards, or social prices, to estimate unseen qualities in potential suitors.”

Marriage and Economics

“The estimation of unknown qualities is central to the search for a spouse.”

Indifference Curves

Once again, notice how indifference curves bow in towards the origin This is because most people do not like

extremes For example, most people would rather have

some shirts and some hats than many shirts and no hats

The changing preference results in the traditional inward-curving indifference curves

The changing preference also illustrates the effects of diminishing returns

For example…

In this example, diminishing returns simply means that the first hat Jim gets makes him happier than the second hat, which makes him happier than the third, and so on

For example…

Jim’s marginal utility—the extra utility he gets with each hat—decreases with the number of hats he gets

For example…

After a while, Jim has had enough of hats—the extra ones don’t make him happier—and he’d rather get a shirt

In fact, he may even trade several hats for one shirt

How can you relate marginal utility to the Bachelor?

What about multiple indifference curves?

Different indifference curves represent different levels of utility

In general, more is better: the more goods you have, the happier you are

Other notes on indifference curves Indifference curves can NEVER cross

Why? How can you tell that the indifference

curves we’ve looked are for normal goods? Because more of either good increases

utility

Odd Situations with Indifference Curves

Indifference Curves: Undesirable Goods

If one good is a normal good, and the other is an undesirable good, the curves will look like the image to the left

An increase in the number of CDs causes an increase in utility

But, an increase in the amount of Spam results in a decrease in utility

Indifference Curves: Neutral Goods What if the consumer

doesn’t care about one of the goods?

CDs and expired baseball tickets

Increasing or decreasing the # of baseball tickets makes NO difference in the curve

Only changing the number of CDs shifts the curve

Indifference Curves: Complementary Goods

Demand for complementary goods is directly related i.e. buying one

good increases the probability you’ll buy the other good

Example: mittens

Indifference Curves: Substitutes More is better, but

you don’t care what combination of the two you get

If you had a ton of Pepsi, you would NOT be willing to trade 3 cans of Pepsi for 1 can of Coke This ELIMINATES the

inward bend of the curve

Undesirable, Neutral, or Substitute?

Final Thoughts

It’s impossible to know exactly what goes on inside a buyer’s head while they are making a decision

There are so many differences between consumption bundles, economists have to find ways to simplify all the differences

The indifference curve is much simpler than reality—it needs to be in order to even remotely understand it—WHICH IS THE POINT OF ECONOMICS