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By the end of these notes, you should be able to:
Imagine you are choosing between two goods — let's say apples and oranges. An indifference curve is a line on a graph that shows all the different combinations of two goods that give you exactly the same level of satisfaction (happiness).
In other words, you do not prefer one combination over another — you are completely indifferent (which means you don't care which one you get, because they all feel equally good to you).
Example: Suppose you are equally happy with:
All three combinations sit on the same indifference curve because they give you the same total satisfaction.
An indifference curve is drawn on a graph where:
The curve slopes downward from left to right. This makes sense: if you want more apples, you must give up some oranges in order to stay at the same level of happiness.
The curve is also bowed inward (convex to the origin) — meaning it curves towards the centre of the graph. This happens because of the idea of diminishing marginal utility (the more of something you already have, the less extra satisfaction you get from one more unit of it).
So when you already have lots of apples and very few oranges, you are willing to give up many apples to get just one more orange. But when you already have few apples, you are only willing to give up a small number of apples to get one more orange. This changing willingness to swap one good for another is called the Marginal Rate of Substitution (MRS).
💡 Marginal Rate of Substitution (MRS): The rate at which a consumer is willing to give up one good in exchange for one more unit of another good, while staying at the same level of satisfaction. As you move down the curve, the MRS decreases — you become less willing to keep giving up the good you are running low on.
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