Indifference curves Flashcards
What are bundles
Combinations of goods that people will choose to use
What are the 5 axioms for bundles
Completeness
Transivity
Continuity
Monotonicity
Convexity
What does the axiom of completeness mean
All bundles can be compared
Either A is preferred to B and vica versa
The preference can be weak or strong
What does the axiom of Transivity mean
All bundles can be ranked consistently
If A is preferred to B and B is preferred to C then A is preferred to C
What doe the Axiom of Continuity mean
Similar bundles should have similar rankings
If A is strictly preferred to B and B is close to C then A is weakly preferred to C
What does the axiom of Monotonicity mean
More is better
For all bundles A and B, if A has more of both goods than B then A is strictly preferred
What does the axiom of convexity means
If A is indifferent to B and C is on a line connecting A and B then C is weakly preferred to A and B
What is utility
The number given to a bundles - ordinal concept meaning that only ranking matters
Why cant Indifference curves cross
Because if A and B are on U1 and C is on U2 which is less desirable then A and C cannot also be on the same curve as well as this would create a contradiction
Why are Indifference curves downwards sloping
Because of axiom 4 which shows that if it is upwards sloping then the person is getting more of both goods and there is no trade-off
Why are indifference curves bowed towards the origin
Because of the marginal rate of substitution
The more someone has of good A, the more willing they are to depart with it
What does an indifference curve look like for perfect substitutes - give examples
They are straight lines as the combination doesnt matter - combination of notes totaling $20 are all the same
What does an indifference curve look like for a perfect complement
It will be in an L shape as perfect complements only provide more utility when used together
Example - having 7 different pairs of socks is the same as having 7 different pairs and then 3 extra left socks
What are bads and what to their indifference curves look like
Bads are the opposite of goods where having more of them lowers utility - pollution
They follow a logarithmic shape
What are bliss points and what goods do they apply to
Bliss point is the middle of a circular indifference curve for goods where having more is better up until a point - eg alcohol
