Preferences, Utility and Indifference Curves: every key term you need (+ practice quiz)
25 flashcard terms for Intermediate Microeconomics Topic 1, written to match the course framework. Study them here, then drill them as interactive flashcards, or test yourself with the 15-question quiz — free, no account needed.
A list of quantities of each good a consumer might hold, written as an ordered pair or vector. Choice theory ranks whole bundles rather than single goods, because tradeoffs only make sense when everything is specified at once.
Completeness axiom
For any two bundles the consumer can say she prefers the first, prefers the second, or is indifferent. Without completeness the preference relation cannot be represented by a single number, so no utility function exists.
Transitivity axiom
If bundle A is at least as good as B and B is at least as good as C, then A is at least as good as C. Transitivity rules out preference cycles that would let a trader pump money out of the consumer indefinitely.
Weak preference relation
The ranking read as at least as good as. Strict preference and indifference are both defined from it, which keeps the whole theory resting on one primitive comparison rather than three separate ones.
Indifference curve
The set of bundles among which the consumer is exactly indifferent. It is a level set of the utility function, so moving along it holds satisfaction constant while trading one good for another.
Non-crossing of indifference curves
Two indifference curves cannot intersect under transitivity and monotonicity, since the crossing point would force a bundle to be both better and equally good compared with another, a direct contradiction.
Monotonicity of preferences
More of every good is strictly better, so indifference curves slope downward and bundles to the northeast are preferred. This assumption is what makes the budget line bind with equality at the optimum.
Local non-satiation
Near any bundle there is another bundle that is strictly preferred. Weaker than monotonicity, it is still enough to guarantee the consumer spends her entire budget and that indifference curves have no thick regions.
Convexity of preferences
Averages are weakly preferred to extremes, so the set of bundles at least as good as a given bundle is convex. Convexity is what makes tangency a genuine maximum rather than a minimum.
Strict convexity
A strict taste for mixtures: any average of two indifferent bundles is strictly preferred to both. It guarantees the consumer picks a unique optimal bundle rather than an entire segment of candidates.
Utility function
A numerical index assigning higher numbers to more preferred bundles. It exists whenever preferences are complete, transitive and continuous, and it is a bookkeeping device rather than a measure of felt pleasure.
Ordinal utility
Only the ranking of utility numbers carries meaning; differences and ratios do not. Saying one bundle gives twice the utility of another is economically empty under the ordinal interpretation.
Monotonic transformation
Applying any strictly increasing function to a utility function leaves preferences unchanged. This is why taking logs of a product form is legitimate and why utility levels are never comparable across people.
Marginal utility
The extra utility from one more unit of a good, holding all other quantities fixed. Its numerical value depends on the chosen utility representation, so only ratios of marginal utilities are economically meaningful.
Diminishing marginal utility
Successive units of a good add progressively less utility. It is a property of a particular utility representation, not of preferences themselves, which is why modern treatments lean on convexity instead.
Marginal rate of substitution
The rate at which a consumer will give up good two to gain one more unit of good one while staying indifferent. It equals the ratio of marginal utilities and the absolute slope of the indifference curve.
Diminishing marginal rate of substitution
As a consumer accumulates more of one good she will surrender less of the other to get still more of it. Geometrically this is the convex, bowed-to-the-origin shape of a well-behaved indifference curve.
Perfect substitutes preferences
Goods traded at a constant rate, giving straight-line indifference curves and a constant marginal rate of substitution. Because tangency generally fails, the optimum is usually a corner where all income goes to the cheaper good.
Perfect complements preferences
Goods consumed in fixed proportions, producing L-shaped indifference curves with a kink on the expansion ray. Extra units of one good alone add nothing, so the optimum always sits at the kink.
Cobb-Douglas preferences
Utility given by a product of quantities raised to positive exponents. It yields smooth convex indifference curves and the memorable result that each good absorbs a constant income share equal to its normalised exponent.
Quasilinear preferences
Utility that is nonlinear in one good and linear in the other, so indifference curves are vertical shifts of one another. Demand for the nonlinear good is then independent of income over the interior range.
Homothetic preferences
Preferences whose marginal rate of substitution depends only on the ratio of quantities, not on the scale. Income expansion paths are straight rays and budget shares stay fixed as income grows.
Economic bad
A commodity the consumer would rather have less of, such as pollution or commuting time. Indifference curves slope upward in a diagram with a bad on one axis, since more of it must be compensated by more of the good.
Satiation point
A bundle that is best overall, with utility falling in every direction away from it. Preferences with satiation violate monotonicity, and indifference curves form closed loops around the bliss bundle.
Continuity of preferences
Bundles arbitrarily close to a preferred bundle are also preferred, ruling out sudden jumps in the ranking. Continuity is the technical condition that lets a utility function represent the preference relation.