To familiarise you with these concepts, a summary of the key takeaways from the ‘Rationality’ resource is provided below:
• Utility is a term used in economics to capture the satisfaction or benefit that an individual receives from consuming a particular good or service.
• Individuals are assumed to be entirely rational, which is to say that they are fully informed and weigh-up all of their available choices before coming to a decision.
• Individuals are assumed to behave in a way that maximises their utility; in other words, individuals make choices that maximise their own happiness and well-being.
Economists have long been interested in the modelling of individual preferences and the consumption choices these individuals make. Unfortunately, they are unable to objectively measure the utility that individuals are assumed to maximise through these choices. The solution? Indifference curves! Indifference curves are a useful analytical tool in the study of consumer behaviour, in particular with respect to consumer demand. Moreover, welfare economics makes use of indifference curves to consider the effects of different policy actions or interventions on the wellbeing of individuals.
By the end of this resource you should be able to:
• Understand the application of indifference curves and explain how indifference curves differ
• Explain what determines the shape of indifference curves
• Identify the consumer equilibrium using indifference curves and the consumer budget constraint