Preferences — Explained with Graphs
Simple-English notes with diagrams, based on Varian's Intermediate Microeconomics, Ch. 3
1. What is an Indifference Curve?
An indifference curve joins all the bundles (combinations of two goods) that give the consumer equal
satisfaction. Curves farther from the origin mean higher satisfaction.
Fig 1: Three indifference curves. The consumer is equally happy with any bundle on the same curve. Moving up-right
(arrow) moves to a more preferred curve.
Important rule: two indifference curves can never cross. If they crossed, transitivity would force the
consumer to be indifferent between two bundles that are supposed to be at different satisfaction levels — a
contradiction.
2. Perfect Substitutes
Goods that the consumer is willing to swap for each other at a fixed rate. Example: red pencils and blue
pencils, if the consumer only cares about total pencils.
Fig 2: Straight-line indifference curves with slope −1. The consumer just wants more total pencils, regardless of colour mix.
3. Perfect Complements
Goods that are always used together in a fixed ratio. Example: left shoes and right shoes — an extra left
shoe alone gives no added satisfaction.
Fig 3: L-shaped indifference curves. The corner (kink) always sits where the two goods are in the required ratio (here, 1:1).
4. When One Good is a "Bad"
A bad is something the consumer dislikes (e.g. anchovies on pizza). More of the bad must be compensated
by more of the good to keep satisfaction the same — so the curve slopes upward.
Fig 4: Upward-sloping indifference curves. More anchovies (a bad) needs more pepperoni (a good) to keep the consumer
equally happy.
5. Convex vs Non-Convex Preferences
Convex means the consumer prefers a mixed/average bundle over two extreme bundles that give the same
satisfaction. Most "normal" preferences are convex.
Fig 5 (left): Convex — the average of two equally-good bundles lies on a higher/equal curve. (right): Non-convex — mixing
makes the consumer worse off (classic example: ice cream + olives — good separately, bad mixed together).
Well-behaved preferences in this course = monotonic (more is always better → downward-sloping curves)
+ convex (averages preferred to extremes → curves bow inward toward the origin).
6. Marginal Rate of Substitution (MRS)
MRS is the slope of the indifference curve at a point — it tells you how much of good 2 the consumer is
just willing to give up for a little more of good 1, staying equally satisfied.
Fig 6: MRS = ∆x2/∆x1 = slope of the tangent line at the chosen bundle (x1, x2). It is usually negative.
Diminishing MRS: for convex (well-behaved) preferences, as x1 increases, the consumer is willing to give
up less and less of good 2 for each extra unit of good 1 — this is why the curve gets flatter as you move
right.
Diagrams are simplified illustrations for exam revision, not exact reproductions of the textbook figures.