Indifference Curves

Front 1

Indifference curve

Back 1

shows consumption bundles that give the
consumer the same level of satisfaction/ utility.

Front 2

Marginal rate of substitution

Back 2

• It is the rate at which a consumer is willing to
trade one good for another.

=> The slope at any point on an indifference curve.

Front 3

Four properties of Indifference Curves

Back 3

1. Higher indifference curves are preferred
to lower ones.
2. Indifference curves are downward-sloping.
3. Indifference curves do not cross.
4. Indifference curves are bowed inwards.

Front 4

Why is an indifference curve downward-sloping?

Back 4

A consumer is willing to give up one good only if
he or she gets more of the other good in order to
remain equally happy.

– If the quantity of one good is reduced, the
quantity of the other good must increase.

Front 5

Why is an indifference curve bowed inwards?

Back 5

– Consumers more willing to trade away goods they
have in abundance,
– Differences in a consumer’s marginal substitution
rates cause indifference curves to bow inward.

Front 6

Perfect substitutes

Back 6

– The marginal rate of substitution is a fixed
number.

Front 7

Perfect complements

Back 7

- Two goods with right-angle indifference
curves are perfect complements.

Front 8

The Consumer’s Optimum

Back 8

At the consumer’s optimum, the consumer’s
valuation of the two goods equals the market’s
valuation.

Front 9

Inferior Good as Income Rises

Back 9

Front 10

A fall in the price of one good

Back 10

A fall in the price of any good rotates the budget
constraint outward and changes the slope of the
budget constraint.

Front 11

Income effect

Back 11

The change in consumption that results when a price change moves the consumer to a higher or lower
indifference curve.

Front 12

Substitution effect

Back 12

The change in consumption that results when a price change moves the consumer along an indifference
curve to a point with a new marginal rate of substitution.

Front 13

Deriving the Demand Curve

Back 13

Demand curve can be viewed as a summary of
the optimal decisions that arise from his or her
budget constraint and indifference curves.

Front 14

Giffen goods

Back 14

• Giffen goods are inferior goods for which an
increase in the price raises the quantity
demanded.

Front 15

How do wages affect labour supply?

Back 15

– If the substitution effect is greater than the
income effect for the worker, he or she
works more.

– If income effect is greater than the
substitution effect, he or she works less.

Front 16

Hours of Work/ Consumption vs Hours of Leisure

An increase in the wage:

Back 16