indifference curves. warm-up question what do dating and marriage have to do with economics? ...
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INDIFFERENCE CURVES
Warm-up Question
What do dating and marriage have to do with economics? Scarcity Choice Utility maximization
Economics and Marriage
A market is any mechanism or institution that brings buyers together with sellers
Economists model markets 95% of Americans marry, so most of us
become buyers and sellers of marital partners at some point The marriage market is simply the
mechanism that brings us together
Marriage and Economics
What can be gained from marriage? Are these gains more or less certain than
a salary?
Marriage and Economics
“The estimation of unknown qualities is central to the search for a spouse.”
Utility
Utility The level of happiness or satisfaction that
someone experiences from buying a good or service
Utility is represented on a graph in an indifference curve
The Indifference Curve
The indifference curve is economists’ answer to the age-old question:
What makes buyers happy, and how can we measure that happiness?
An indifference curve is how economists explain preferences
Consumption Bundles
We call the objects of consumer choice “consumption bundles”
Individuals derive satisfaction or utility by consuming bundles of products
Consumption Bundles
A consumption bundle consists of multiple goods between which the consumer is indifferent At each point on the curve, the consumer
has no preference for one bundle over another
The Indifference Curve…
An indifference curve represents all the different combinations of two goods that generate the same level of utility
The Indifference Curve…
What does that mean in plain English? Each point on an
indifference curve represents a combination of goods
All points on one indifference curve give the person the exact same amount of happiness
An indifference curve is mainly used to represent observable demand patterns for individual consumers
For example…
Indifference Curves
Notice how indifference curves bow in towards the origin
The Bachelor & Indifference Curves Markets can exist anywhere Although money may not be involved,
almost everything has a price
The Bachelor & Indifference Curves “Marital searchers look to the wealth of
information that is embodied in prices. Although marital searchers have imperfect information about themselves as well as their suitors, they are the best assessors of their own aspirations and potential, and they use this knowledge to set standards for courtship and marital offers. Searchers use these standards, or social prices, to estimate unseen qualities in potential suitors.”
Marriage and Economics
“The estimation of unknown qualities is central to the search for a spouse.”
Indifference Curves
Once again, notice how indifference curves bow in towards the origin This is because most people do not like
extremes For example, most people would rather have
some shirts and some hats than many shirts and no hats
The changing preference results in the traditional inward-curving indifference curves
The changing preference also illustrates the effects of diminishing returns
For example…
In this example, diminishing returns simply means that the first hat Jim gets makes him happier than the second hat, which makes him happier than the third, and so on
For example…
Jim’s marginal utility—the extra utility he gets with each hat—decreases with the number of hats he gets
For example…
After a while, Jim has had enough of hats—the extra ones don’t make him happier—and he’d rather get a shirt
In fact, he may even trade several hats for one shirt
How can you relate marginal utility to the Bachelor?
What about multiple indifference curves?
Different indifference curves represent different levels of utility
In general, more is better: the more goods you have, the happier you are
Other notes on indifference curves Indifference curves can NEVER cross
Why? How can you tell that the indifference
curves we’ve looked are for normal goods? Because more of either good increases
utility
Odd Situations with Indifference Curves
Indifference Curves: Undesirable Goods
If one good is a normal good, and the other is an undesirable good, the curves will look like the image to the left
An increase in the number of CDs causes an increase in utility
But, an increase in the amount of Spam results in a decrease in utility
Indifference Curves: Neutral Goods What if the consumer
doesn’t care about one of the goods?
CDs and expired baseball tickets
Increasing or decreasing the # of baseball tickets makes NO difference in the curve
Only changing the number of CDs shifts the curve
Indifference Curves: Complementary Goods
Demand for complementary goods is directly related i.e. buying one
good increases the probability you’ll buy the other good
Example: mittens
Indifference Curves: Substitutes More is better, but
you don’t care what combination of the two you get
If you had a ton of Pepsi, you would NOT be willing to trade 3 cans of Pepsi for 1 can of Coke This ELIMINATES the
inward bend of the curve
Undesirable, Neutral, or Substitute?
Final Thoughts
It’s impossible to know exactly what goes on inside a buyer’s head while they are making a decision
There are so many differences between consumption bundles, economists have to find ways to simplify all the differences
The indifference curve is much simpler than reality—it needs to be in order to even remotely understand it—WHICH IS THE POINT OF ECONOMICS