Indifference Curves (represents a consumers unique preferences over the two goods A and B)
Represents all combos of two goods such that the consumer is entirely indifferent among them.
Non-satiation: More is ALWAYS better: Ensures that all bundles lying directly above; directly to the right of; or both point A must be preferred to bundle A. Above and to the right: Preffered to bundle A set
Below and to the left: ‘dominated-by-bundle A’ set
A -Slope denotes that a decrease in one good leads to an increase in the other
Curvature reveals - (marginal rate of substitution) the strength of consumers willingness to trade off one good for the other - the indiff. curvature is convex from the origin indicating that the wilingness to give up A to obtain B diminishes the more B and the less A the bundle contains
MRS - the rate at which the consumer is willing to give up A to obtain a little B, holding utility constant - indicates a movement along the indifference curve.
Should convexity approach Y, the consumer is not willing to give up A for B and vice versa. Aka, the value being placed on B is diminishing as the slope of A/B becomes more positive
The MRSab is the negative of the slope of the tanger to the indifference curve at any given bundle. So, if slope indiff. = -n, that indicates consumer is willing to give up A to obtain B at a rate of [absolute value -n] parts A per parts B
Convexity assumption indicates that MRS diminishes as consumer moves toward more B and less A
Indifference Curves in Decision Making
Indifference curve map: The consumers entire utility function
*completeness assumption, transitive assumption
Price increase on Y axis - constraint becomes ‘flatter’
Price increase on X axis - Constraint becomes ‘steeper’ as it approaches the origin
Opportunity Sets (Consumption, Production, Investment)
Consumption: Budget constraint, -slope
Production: Budget constraint, -slope but concave as marginal opportunity cost increases as more A is produced resulting in fewer outputs for B
Investment: Can structure her investment opportunities as a frontier that shows the highest expected return consistent with any given level of risk…The investor’s choice of a portfolio on the frontier will depend on her level of risk aversion.