Now let's see how different consumption bundles, different amounts of goods can lead to the same amount of happiness or satisfaction for the consumer, alright? These are going to show us our indifference curves. So we talked about budget constraints and budget constraints show us consumption bundles that we can afford with our income, okay? So we are talking about we have a certain amount of income, what can we buy with that income regardless of how happy that's going to make us. Okay? And indifference curve, it disregards money now. We're not considering how much money things cost. We're just going to think about the satisfaction. Alright? It shows consumption bundles that give the same amount of satisfaction or we use this term in economics, utility for satisfaction. Okay? We're going to define it right down here. Utility, one more time, is the satisfaction or happiness that one receives from the consumption of goods. Okay? So you can imagine this is going to be kind of an abstract topic, right? When we talk about utilities, we're going to talk about the unit of util. The util is the measurement of utility and we use this U to measure it. A U for utility. But let's think about this like it's going to be really hard to quantify how much utility you get from something, right? When you eat a slice of pizza, it's not like you're saying, I'm getting a 150 utils of satisfaction out of this or right? Then we can't really talk about it like that, it's pretty abstract but it does help us in these situations cause we can quantify different levels of happiness or satisfaction based on our consumption, alright? So we've got this utility concept and of course whenever we talk about a new concept, we're gonna talk about marginal of that concept. So we've got marginal utility right here and what is that going to tell us? We should be pretty used to marginal at this point. We're going to see that marginal utility is the additional, right? Marginal being additional, right? What do we get? Additional satisfaction from consuming one more of the good, right? Marginal, that's the whole thing with marginal. We add one more, how much extra satisfaction? How many extra utils am I getting out of this extra consumption? Okay? And what we're gonna see is that utility follows that law of diminishing returns. Right? We've seen diminishing returns before and that's the idea of the more you consume, the less marginal utility you're gonna get. So you can imagine the first slice of pizza you eat, you're going to get tons of utility, thousands of utility from that first slice. The second slice of pizza maybe 500 utility, right? Third slice, 200 and now you're starting to get full, you're not satisfied by the pizza as much. So that utility keeps going down. Right? It keeps decreasing as we eat more and more of the same good. Okay. So we have those diminishing returns. Let's go ahead and see indifference curves on the graph and let's continue with our example of party boy Paul. So party boy Paul gains the same amount of utility from the consumption bundles shown in the table. Graph the indifference curve for PVP's consumption of vodka and beer. So quick note we have to make about utility, there's no way that you could have figured this out, right? There's no way you could have known how much vodka and how much beer gives him a certain level of satisfaction. This kind of information has to be given to you, okay? So let's look at this first table where we have utility of 500, right? Notice, the utility is staying constant. The amount of satisfaction we get from all these different bundles, a, b, c, and d, it's the same. So we would be indifferent if we had 1 vodka and 9 beers or if we had 2 vodkas and 4 beers, 4 vodkas and 2 beers, all of these would provide the same amount of satisfaction, to party boy Paul in this case. So let's start with this first indifference curve, right, where no matter what consumption we do along this curve, it will provide us 500 utils of utility, of satisfaction. So remember, we still got vodka on this axis and the quantity of beer on this axis. Okay. So our graph hasn't changed. Right? We're still showing quantity and quantity on the axes and now we've just got different bundles here. So let's start with bundle a where we have 1 vodka and 9 beers. So 1 vodka and 9 beers is gonna put us somewhere out here. I'm gonna put an A right there. Let's go on to B. So B, we have 2 vodka and 4 beer. So 2 vodkas and 4 beers puts us right around there and that's b. How about C? Bundle C has 4 vodka and 2 beers right here, and finally D has 7 vodka and 1 beer. So 5, 6 this is 7 right here, 1 beer. There we go. These are our points, so that was point C, this is point D. Alright, let's go ahead and connect these points and make our that was pretty good. That's our first indifference curve and this represents all of the possible combinations of vodka and beer that provide 500 utils. Right? So this indifference curve shows us all the combinations where party boy Paul will get 500 utils of satisfaction. Now what about this curve where utility is 750? So he's getting more satisfaction from these bundles, right? So you can imagine if he could pick from because it has more utility, right? He's gonna get more satisfaction out of that bundle, so let's go ahead and mark these in. I'm gonna draw this one in blue. So we've got bundle E with 2 vodka and 9 beer. That's gonna be right here, E. F is gonna have 3 vodka and 5 beer right there and notice these points where they are, they're all further away, right? They're further out from the origin because they're providing more utility, right? So we would imagine we want more, we're gonna consume more to get more utility. That's the idea here. Here. Higher consumption is higher utility. So let's kind of see it continue. So how about 5 vodka and 3 beer and then finally 8 vodka up here. This was 8 and 2 beers. So any of these combinations would provide 750 utils to party boy Paul, right? And anywhere else along the curve also provides that amount of utility. So we just picked out some key points here, but there is a whole curve with all the different utility that Party Boy Paul can get. Man that was pretty good too. So this one is our 750 utils curve right there, right? So that's how we graph our indifference curves and once what we've started to build here is what we call an indifference curve map. Okay. So the indifference curve map, it's basically a collection of indifference curves, so it's going to be a bunch of different indifference curves representing the consumer's utility function, right? We've got different levels of utility and that's based on different levels of consumption. So you can imagine there's more than just these two curves, we just represented 2 situations where he's gonna have 500 utility or 750. But what about a situation where he'd have 600 utility or 800 utility, a 1000 utility, a 100 utility. Right? There's gonna be all these different curves and you could imagine that there would be infinite curves just like this going all the way up and all the way down here. Right? There would be curves everywhere based on different levels of utility and that is the indifference curve map. Alright, so each person is going to have all these different indifference curves based on their joy, the utility that they get from the consumption. Okay? So one last concept here is the marginal rate of substitution. Okay, so this marginal rate of substitution, it's the amount of a good the consumer is willing to give up for 1 unit of the other good. Okay? And when we talk about marginal rate of substitution, the easy way to think about it is it's just the slope of the indifference curve at any point, at whatever point we choose. Okay? So when we do the slope, it can be tricky to find the slope at a point because it's constantly changing compared to a straight line. If we had a straight line, the slope is constant and it would be one number the whole time, but here the slope is changing, right? We see it change and it's steep at the beginning and then it starts to wane and then it becomes very shallow. Right? So if you don't remember, here is our formula for slope where we take the change in Y over the change in X, right? How much did the Y change divided by how much did the X change and you might remember this from algebra as the rise over the run, right? We're going to see how much the up down change, that's the rise and the run is the left or right change. Now with the MRS, marginal rate of substitution, it's always going to be positive. We just want a positive number, right? How many of these units are we giving up for the other, so it's not going to be, you know, whether is it positive or negative, we just want the absolute value, we just want the number. So let's go back to this idea where we were talking about him getting 500 utils, right, the utility the indifference curve for the 500 utils and let's see what the marginal rate of substitution is when he's consuming 7 vodkas. So when he's consuming 7 vodkas, right? How many vodkas is he willing to give up for another beer? If he wants one more beer, well he's currently got one beer, right, when he's got 7 vodkas, but he wants to get over to 2 beers. So what is that marginal rate of substitution? Well, he's gonna give up from 7 down to 4, so he's willing to give up 3 vodkas there for 1 more beer at this point, right? Because he doesn't have that much beer. He only has one beer and he's got a ton of vodka, so you can imagine all those vodka shots it gets a little boring after a while. He wants a beer, clear his throat, chill out a little bit, right? So that beer is very valuable to him at this point because he doesn't have a lot of beer yet. So let's go on and see what that means. So we had a rise, right? Sorry, we had the rise in that situation is this 3, right? We had 3 vodkas less, our change in y is 3, and our change in x is 1, right? The run right here goes from 1 to 2. We have one extra beer. So our rise over run is 3 divided by 1. MRS, marginal rate of substitution, is going to equal 3 in that case, but it's not constant. Remember, we've got a curve. It's going to be changing. So let's see how about when he's consuming 4 vodkas, what is his marginal rate of substitution? So let's do the same thing. Notice so to get from one point to the next, we have to go down by 2 here and over by 2. Right? So we went over by 2 here from one point to the next because it's curved. Right? It doesn't necessarily cross at this point right there. It could be curved and it could be crossing somewhere else, so what we're kind of doing is taking the average slope over this region. So the average slope over this region, this one up here, I'm gonna put the one up here, right? So over this region, we decreased by 2 and we also the rise was 2, and the run was 2 as well. So we're going to have 2 divided by 2 or MRS is equal 2 divided by 2, which is equal to 1. Notice it changed, right? At this point, since we already have some beer, we're less willing to give up vodka, right? We still want to keep some of our vodka, so we would only trade 1 vodka away for one more beer at this point to stay indifferent and keep our satisfaction the same. Now what about when we only have 2 vodkas vodkas behind me here, right? What's going to be the marginal rate of substitution when we're down to just 2 vodkas? You can imagine that he's going to be pretty possessive of these. He doesn't want to give up those vodkas really easily because he's only got a few left, alright? So let's see what happens. When he's in a situation where he's got 2 vodkas here, well, to give up that vodka, right? To give up that vodka, he's gonna have to get 5 beers, right? This is all the way out here is 9, so he'd have to get 5 beers to give up that one vodka at that point. So you could see that it takes a lot once we get to those edges. Just like we saw at the beginning, he was willing to give up a lot of vodka to get a little more beer. Well now he's not willing to give up much vodka because he doesn't have so much left. Alright? So our rise was 1, the rise over run. Right? The rise was 1, the run was 5 in this case and it doesn't matter positive or negative. Remember, we just want the absolute value. We want the number here. So the MRS is going to equal the rise of 1 divided by 5, the run, which is just 1 fifth. So he would only be willing to give up 1 fifth of a vodka for another beer, right? So just to let's put it in words, In this first situation, the idea is that he would be willing to give up 3 vodka for 1 beer. Right? And the same thing for the next ones. In the second box, he'd be willing to give up 1 vodka for 1 beer and then in that final situation, he'd only be willing to give up 1 fifth of a shot of vodka for the next beer. Alright? So that's about it here, let's go ahead and move on to the next video.
Table of contents
- 0. Basic Principles of Economics1h 5m
- Introduction to Economics3m
- People Are Rational2m
- People Respond to Incentives1m
- Scarcity and Choice2m
- Marginal Analysis9m
- Allocative Efficiency, Productive Efficiency, and Equality7m
- Positive and Normative Analysis7m
- Microeconomics vs. Macroeconomics2m
- Factors of Production5m
- Circular Flow Diagram5m
- Graphing Review10m
- Percentage and Decimal Review4m
- Fractions Review2m
- 1. Reading and Understanding Graphs59m
- 2. Introductory Economic Models1h 10m
- 3. The Market Forces of Supply and Demand2h 26m
- Competitive Markets10m
- The Demand Curve13m
- Shifts in the Demand Curve24m
- Movement Along a Demand Curve5m
- The Supply Curve9m
- Shifts in the Supply Curve22m
- Movement Along a Supply Curve3m
- Market Equilibrium8m
- Using the Supply and Demand Curves to Find Equilibrium3m
- Effects of Surplus3m
- Effects of Shortage2m
- Supply and Demand: Quantitative Analysis40m
- 4. Elasticity2h 16m
- Percentage Change and Price Elasticity of Demand10m
- Elasticity and the Midpoint Method20m
- Price Elasticity of Demand on a Graph11m
- Determinants of Price Elasticity of Demand6m
- Total Revenue Test13m
- Total Revenue Along a Linear Demand Curve14m
- Income Elasticity of Demand23m
- Cross-Price Elasticity of Demand11m
- Price Elasticity of Supply12m
- Price Elasticity of Supply on a Graph3m
- Elasticity Summary9m
- 5. Consumer and Producer Surplus; Price Ceilings and Floors3h 45m
- Consumer Surplus and Willingness to Pay38m
- Producer Surplus and Willingness to Sell26m
- Economic Surplus and Efficiency18m
- Quantitative Analysis of Consumer and Producer Surplus at Equilibrium28m
- Price Ceilings, Price Floors, and Black Markets38m
- Quantitative Analysis of Price Ceilings and Price Floors: Finding Points20m
- Quantitative Analysis of Price Ceilings and Price Floors: Finding Areas54m
- 6. Introduction to Taxes and Subsidies1h 46m
- 7. Externalities1h 12m
- 8. The Types of Goods1h 13m
- 9. International Trade1h 16m
- 10. The Costs of Production2h 35m
- 11. Perfect Competition2h 23m
- Introduction to the Four Market Models2m
- Characteristics of Perfect Competition6m
- Revenue in Perfect Competition14m
- Perfect Competition Profit on the Graph20m
- Short Run Shutdown Decision33m
- Long Run Entry and Exit Decision18m
- Individual Supply Curve in the Short Run and Long Run6m
- Market Supply Curve in the Short Run and Long Run9m
- Long Run Equilibrium12m
- Perfect Competition and Efficiency15m
- Four Market Model Summary: Perfect Competition5m
- 12. Monopoly2h 13m
- Characteristics of Monopoly21m
- Monopoly Revenue12m
- Monopoly Profit on the Graph16m
- Monopoly Efficiency and Deadweight Loss20m
- Price Discrimination22m
- Antitrust Laws and Government Regulation of Monopolies11m
- Mergers and the Herfindahl-Hirschman Index (HHI)17m
- Four Firm Concentration Ratio6m
- Four Market Model Summary: Monopoly4m
- 13. Monopolistic Competition1h 9m
- 14. Oligopoly1h 26m
- 15. Markets for the Factors of Production1h 33m
- The Production Function and Marginal Revenue Product16m
- Demand for Labor in Perfect Competition7m
- Shifts in Labor Demand13m
- Supply of Labor in Perfect Competition7m
- Shifts in Labor Supply5m
- Differences in Wages6m
- Discrimination6m
- Other Factors of Production: Land and Capital5m
- Unions6m
- Monopsony11m
- Bilateral Monopoly5m
- 16. Income Inequality and Poverty35m
- 17. Asymmetric Information, Voting, and Public Choice39m
- 18. Consumer Choice and Behavioral Economics1h 16m
18. Consumer Choice and Behavioral Economics
Indifference Curves
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