What the consumer can afford given the income and price of goods
Budget constraint: the limit on the consumption bundles that a consumer can
The rate at which the consumer can trade one good for another. (slope-
Indifference curve: shows the consumption bundles that give the consumer the
same level of satisfaction.
Marginal rate of substitution: the rate at which a consumer is willing to
trade one good for another.
Choose the point on the higher indifference curve.
4 properties of indifference curves
Higher indifference curves are preferred to lower ones. (get more)
Indifference curves are downward sloping
Indifference curves do not cross
Indifference curves are bowed inward
Perfect substitutes: two goods with straight line indifference curves
Perfect complements: two goods with right angle indifference curves.
The point at which the indifference curve and the budget constraint touch is called the
Slope of indifference curve is the marginal rate of substitution (consumer)
Slope of the budget constraint is the relative price (market)
Choose where the marginal rate of consumption