Economics – Indifference curves and budget lines | e-Consult

An indifference curve is a curve on a utility graph that shows combinations of two goods that provide the consumer with the same level of satisfaction. It represents all possible combinations of goods where the consumer is indifferent between them. A higher indifference curve indicates a higher level of utility. The slope of the indifference curve reflects the rate at which the consumer is willing to trade one good for another (the marginal rate of substitution - MRS).

A budget line is a line on a utility graph that shows all possible combinations of two goods that the consumer can afford, given their income and the prices of the goods. It is derived from the consumer's budget constraint: P_XX + P_YY = Income, where P_X is the price of good X, P_Y is the price of good Y, X is the quantity of good X, and Y is the quantity of good Y.

Diagram: (A diagram should be included here showing an indifference curve and a budget line intersecting at an optimal point. The axes should be labelled 'Good X' and 'Good Y'. The budget line should slope downwards from left to right.)

Changes in income affect the position of the budget line. If income increases, the budget line shifts outwards, moving further away from the origin. If income decreases, the budget line shifts inwards, moving closer to the origin. The slope of the budget line remains constant, reflecting the relative prices of the goods.