By Brennan T. Beal
Impetus For The Post
When I first learned about utility functions and their associated indifference curves, I was shown an intimidating figure that looked a bit like the image below. If you were lucky, you were shown a computer generated image. The less fortunate had a professor furiously scribbling them onto a board.
A few things were immediately of concern: why are there multiple indifference curves for one function if it only represents one consumer? Why are the curves moving? And… who is Natasha? So, while answering my own questions, I thought sharing the knowledge would be helpful. This post will hopefully provide a better description than maybe most of us have heard and by the end you will understand:
- What indifference curves are and what they represent
- How a budget constraint relates to these indifference curves and the overall utility function
- How to optimize utility within these constraints (if you’re brave)
For the scope of this post, I’ll assume you have some fundamental understanding of utility theory.