Preferences

Ranking bundles

Preferences are just a consistent ranking of consumption bundles. We summarize that ranking with indifference curves — each curve joins bundles the consumer likes equally well, and curves farther from the origin are preferred (more is better).

For well-behaved preferences we assume two things:

  • Monotonicity — more of either good is better, so indifference curves slope down.
  • Convexity — averages are preferred to extremes, so curves bow in toward the origin.

The slope of an indifference curve is the marginal rate of substitution (MRS) — the rate at which the consumer will trade good 2 for good 1 while staying equally happy. Convexity makes the MRS diminishing: the more good 1 you already have, the less good 2 you’ll give up for another unit.

Not every preference is “well-behaved,” though. Four shapes cover most of the course:

  • Cobb–Douglas — smooth, convex, the workhorse case.
  • Perfect substitutes — goods trade at a fixed rate; indifference curves are straight lines.
  • Perfect complements — goods used in fixed proportions; L-shaped curves.
  • Quasilinear — curves are vertical shifts of one another (no income effect in good 1).

Try it. Switch the preference type and slide the parameter. Watch the indifference-curve map change shape — and notice how the trade-off (MRS) differs across types.

What to notice

  • Cobb–Douglas curves never touch the axes — the consumer always wants some of both goods.
  • Perfect substitutes have a constant slope: the optimal choice is usually a corner (all of whichever good gives more utility per dollar).
  • Perfect complements care only about the ratio — buying more of just one good leaves you on the same indifference curve.
  • Quasilinear curves are parallel vertical shifts, which is why there’s no income effect in good 1 — the fact that makes consumer-surplus welfare analysis clean.