Indifference Curves Locus of points representing different bundles of two goods, each of which yields the same level of total utility. It is a graphical representation. Conveys consumer’s indifference between various choices. Negatively sloped & convex in shape.

Typical Indifference Curve

Indifference Map Quantity of Y Quantity of X I II III IV

Marginal Rate of Substitution MRS shows the rate at which one good can be substituted for another while keeping utility constant Measures slope of the indifference curve Diminishes along the indifference curve as X increases & Y decreases( due to diminishing marginal utility) Ratio of the marginal utilities of the goods

Marginal Utility Addition to total utility attributable to the addition of one unit of a good to the current rate of consumption, holding constant the amounts of all other goods consumed. The Last Rupee spent on each commodity is the same. The Marginal utility falls as consumption increases.

Utility Maximisation Utility maximisation subject to a limited money income occurs at the combination of goods for which the indifference curve is just tangent to the budget line

Conditions for Consumer Equilibrium MRS = Ratio of Prices The prices of the commodities on offer matches the consumer’s willing to pay. MRS continuously falls due to diminishing marginal utility. Equilibrium is achieved where the budget line is tangent to the indifference curve.