Think about what restricts your choices when it comes to buying goods and services. Your income is one variable. Prices are another. What about what you like and don’t like? That’s an important one!

Your preferences play a huge role in how you decide to spend your money. We often face so many options when it comes to what we buy that it can be difficult to decide. Even with a simple example of pizzas and coffees, there can be many combinations that would give you the same level of satisfaction or happiness – what economists call utility. There are also many combinations to which you might find yourself totally indifferent.

In this video, Arizona State University’s Professor Joana Girante will show you how to graph an indifference curve. She’ll also introduce you to marginal rates of substitution (don’t worry, it sounds more complicated than it is!). We’ll also take a look at how perfect substitutes and perfect complements change the shape of an indifference curve.

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