Changes

In graphing your utility for two goods, you can construct what is known as an “indifference curve.”  Let’s take an example.  Suppose you are working on the homework for this course with three friends - Chris, Stephanie and Kevin.  Someone says they are hungry and go to look for snacks.  You see a half-eaten bag of potato chips and you pop a bag of popcorn.  However, there is not enough food for everyone, so have to ration who receives what.

In graphing your utility for two goods, you can construct what is known as an “indifference curve.”  Let’s take an example.  Suppose you are working on the homework for this course with three friends - Chris, Stephanie and Kevin.  Someone says they are hungry and go to look for snacks.  You see a half-eaten bag of potato chips and you pop a bag of popcorn.  However, there is not enough food for everyone, so have to ration who receives what.

You count 24 potato chips and 40 kernels of corn.  Uh oh.  There are four of you.  On average, that’s only 6 potato chips and 10 kernels of corn per person.  You tell everyone that.

You count 24 potato chips and 40 kernels of popcorn.  Uh oh.  There are four of you.  On average, that’s only 6 potato chips and 10 kernels of popcorn per person.  You tell everyone that.

But Chris likes potato chips more than corn; Stephanie prefers the opposite.  To decide how to allocate the food, you ask Chris and Stephanie to draw their indifference curves with potato chips on the y-axis and corn on the x-axis.  You learn from the curve that Chris is just as happy with 9 potato chips and 2 kernels of corn as receiving 6 potato chips and 10 kernels of corn.  Chris’s utility is same in both cases.  Meanwhile, Stephanie is just as happy receiving 18 kernels of corn and 1 chip.  Fine, you give Chris 9 chips and 2 kernels and Stephanie 18 kernels and 1 chip.

But Chris likes potato chips more than corn; Stephanie prefers the opposite.  To decide how to allocate the food, you ask Chris and Stephanie to draw their "indifference curves" with potato chips on the y-axis and corn on the x-axis.  You learn from the curve that Chris is just as happy with 9 potato chips and 2 kernels of popcorn as he would be if he received 6 potato chips and 10 kernels of corn.  Chris’s overall utility (or satisfaction) is the same in both cases.  Meanwhile, Stephanie is just as happy receiving 18 kernels of popcorn and 1 chip.  Fine, you give Chris 9 chips and 2 kernels and Stephanie 18 kernels and 1 chip.

Was this worth it?  Yes: now you have two extra potato chips that you would not have had by splitting everything equally.  Chris and Stephanie are just as happy, and you can share the additional chips with Kevin.

Was this worth it?  Yes: now you have two extra potato chips that you would not have had by splitting everything equally.  Chris and Stephanie are just as happy, and you can share the additional chips with Kevin.

<show graphs for three types of indifference curves, including perfect substitutes and perfect complements>

The first graph below is for a typical set of three indifference curves (I₁, I₂ and I₃) for someone for two goods X and Y.  Note that this graph does not compare Price and Quantity, but compares the Quantity of good X (on the x-axis) with the Quantity of good Y (on the y-axis).  As one goes down a specific curve, the person is "indifferent" with giving up Quantity of good Y in exchange for more of good X.  The person becomes more satisfied or happier when he shifts to an entirely new curve, as in moving from I₁ to I₂.  The second graph below is for two goods X and Y that '''''are perfect substitutes for each other'''''.  In the case of perfect substitutes, the person is happy to substitute one good for the other on a one-for-one basis, and hence the slope of the curves is a perfect negative one.

==Consumer Surplus==

==Consumer Surplus==