7.2.1—Indifference curves and budget lines

An indifference curve contains combinations of two goods that give the consumer the same satisfaction. A budget line contains combinations that exhaust income at given prices.

For standard preferences, indifference curves are downward sloping and convex because the marginal rate of substitution usually falls. The budget line’s slope reflects the relative prices; its intercepts reflect income divided by each price.

If income is $60 and prices are$10 for X and $5 for Y, the intercepts are 6 units of X and 12 of Y. Any point inside is affordable but leaves income unspent.

An indifference curve is not a demand curve, and points on a higher curve are preferred only if the curves represent the same preferences and are reachable.