listing the quantities of the goods on the respective axes. The figure also depicts
a number of the consumer’s indifference curves as a way of representing her
preferences.
As its name suggests, an indifference curveshows all combinations of the
goods among which the individual is indifferent. The consumer is indifferent
between all bundles on the same curve. Using the middle indifference curve
in the figure, we see that the consumer is indifferent between the bundle con-
taining 15 units of Y and 2 units of X (point A), 10 units of Y and 3 units of X
(point B), and 4 units of Y and 6 units of X (point D). The bundles corre-
sponding to points C, E, and F lie on the same indifference curve and are
equally preferred by the consumer.
We can make three observations about the consumer’s indifference curves.
First, as we move to greater quantities of bothgoods, we move to higher and
higher indifference curves. The figure depicts three different indifference
curves. The consumer’s welfare increases as we move to curves farther to the
northeast in the figure.^1 Second, we note that the indifference curve is down-
ward sloping. Since both goods are valued by the consumer, a decrease in one
good must be compensated by an increase in the other to maintain the same
level of welfare (or utility) for the consumer.
Third, we note that the slope of each curve goes from steep to flat, mov-
ing southeast along its length. This means that the trade-off between the goods
changes as their relative quantities change. For instance, consider a movement
from A to B. At point A, the consumer has 15 units of Y (a relative abundance)
and 2 units of X. By switching to point B, she is willing to give up 5 units of Y
to gain a single additional unit of X. Thus, the trade-off is five to one. By mov-
ing from point B (where Y is still relatively abundant) to point C, the consumer
is willing to give up another 3 units of Y to get an additional unit of X. Now the
trade-off between the goods (while leaving the consumer indifferent) is three
to one. The trade-offs between the goods continue to diminish by movements
from C to D to E. Thus, the indifference curve is bowed. This shape represents
a general result about consumer preferences:The greater the amount of a good a consumer has, the less an additional unit is
worth to him or her.This result usually is referred to as the law of diminishing marginal utility.In our
example, moving southeast along the indifference curve means going from a
relative abundance of Y and a scarcity of X to the opposite proportions. When
X is scarce, the consumer is willing to trade many units of Y for an additional122 Appendix to Chapter 3 Consumer Preferences and Demand(^1) One way to think about the indifference curve is to view it as a contour elevation map. Such a map
has contour lines that connect points of equal elevation. Theoretically, there is a line for every ele-
vation. Practically, we cannot have an infinite number of lines, so we draw them for only a few ele-
vations. Similarly, we draw a few representative indifference curves for the consumer. Bundles of
goods lying on “higher” indifference curves generate greater welfare.
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