Utility and Indifference Curves

Utility and Indifference Curves - won't really mind either...

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Utility and Indifference Curves We know how to represent changes in demand as price or income changes on a graph, but how can we show preferences? What makes buyers happy and how can we measure that happiness? Economists use the term utility when referring to the level of happiness or satisfaction that someone experiences from buying (or selling) goods and services: the more utility, the happier the person. Utility is typically represented on a graph in an indifference curve. An indifference curve represents all of the different combinations of two goods that generate the same level of utility. What this means is that each point on an indifference curve represents a combination of goods. All points on one indifference curve give the person the exact same amount of happiness. For instance, if you give Jim a choice between points A and B on this indifference curve, he
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Unformatted text preview: won't really mind either way, he is indifferent. One shirt and two hats makes him just as happy as two shirts and one hat, which is why both points are on the same indifference curve. Indifference Curves A few more important observations about one person's indifference curves: they can never cross. Why is this true? Think about it this way: if curve 2 is supposed to make you happier than curve 1, but curve two crosses curve 1, then that means that at the point of intersection, you are experiencing two different levels of utility, that is, you are both happy and happier at the same time, which makes no sense. Thus, indifference curves never intersect, but move further away from the origin with increased levels of utility. A Correct Set of Indifference Curves...
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This note was uploaded on 02/09/2012 for the course ECO ECO2013 taught by Professor Jominy during the Fall '08 term at Broward College.

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Utility and Indifference Curves - won't really mind either...

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