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This leads to a decision as the consumer will look to maximise their utility based on purchasing a number of goods which allow them to reach the highest possible total utility.However, as mentioned before, the consumer will be constrained in their spending by their income; known as their budget constraint.This can be seen in the figure below: Figure 3 - A visualisation of Marginal Rate of Substitution.
In this case, they would be indifferent when it comes to choosing any one of them given that the utility received is the same.
Figure 1 - Example Indifference Curve for Apples vs.
Essentially, it can be viewed as the willingness to trade one good for another.
The complexity in this comes from that fact that the rate may differ depending on the actual quantity of the good already held.
The law of ‘Diminishing Returns’ must also be considered here given that it could be expected that as a consumer demands more of a particular good; the utility received from that good decreases. However, what needs to be added here is the idea of the , and how this impacts on utility.
With this in mind, there is some link between the utility of the good and the price elasticity of the good.
Observations will tell us that consumer choices differ widely, be it between countries/ demographics, or just between one consumer and another.
Economists base their analysis on general propositions; making three general assumptions.
On other hand, any basket of goods which lies below the indifference curve will be viewed as less desirable; we should always remember that a consumer will look to maximise their utility given the resources they have; i.e. Three features of indifference curves have been mentioned: they slope downward, higher curves are preferred to lower ones, and they cannot intersect.
Convexity can be seen as a fourth feature of indifference curves.