If you watching this video,

it's probably because

the individual choice model

and indifference curves in particular

are making your head hurt.

Well don't worry.

We're going to clear it all up.

The first thing to get straight

is your graph.

In particular the axis of your graph.

For simplicity we're trying to model

how one individual chooses

between two different goods

say Burritos and movie tickets.

One axis of our graph

measures the number of Burritos

that person buys,

and the other axis measures

how many movie tickets they buy.

So before we go any further

let's remind ourselves

that this graph is not the same

as supply and demand.

Supply and demand has price on the vertical

and the quantity of one good

on the horizontal.

This graph shows quantities

of two different goods

one on each axis.

Moreover, supply and demand

is for dozens of producers

and millions of consumers.

This graph models the decision

of one person

and let's do a quick recap of XY graphing

from high school.

On this graph a point represents

a particular combination

of movie tickets and Burritos.

For example, this point represents

three movies and five Burritos.

While this point represents

six movies and two Burritos.

The individual choice model

uses the same graph

that our budget lines did.

In this case

suppose our theoretical person

call her Zoe,

has a $180 to spend every month.

Movie tickets are $9

while a Burrito is $6.

We find our budget line

by finding the intercepts.

If Zoe spent all $180 on movie tickets

she could get 20 tickets per month.

On the other hand

if she instead spent all $180 on Burritos

she could get 30 burritos per month

but like most people

she is probably more interested

in a combination of Burritos and movies.

The combinations she can afford

are given by the line

connecting these intercepts.

Remember each one of the points on that line

represents a specific combination

of Burritos and movies.

Let's talk about those combinations

for a second.

Each combination of Burritos and movies

gives Zoe a certain amount of happiness,

presumably zero Burritos and zero movies

gives her zero enjoyment,

but other combinations are tasty

and keep her entertained.

So she gets some positive quantities

of happiness from those.

Wait, did we just claim

that it's possible

to quantify human happiness?

Yes of course. We're economists.

We do stuff like that all the time,

but it's a little cumbersome

to keep track of a happiness number

for every Burrito-movie combination.

So what if we graph those

happiness numbers vertically

and we don't have to just plot a few points,

we can put in the happiness level

for every single combination

and it would form sort of a surface like this.

So what is this thing showing us?

For a given amount

of Burritos and movie tickets

the height of the surface above the graph

shows the resulting happiness for Zoe.

Now obviously she wants to get

as high up on that surface as possible

because that will give her

the most happiness possible,

but to do that

we need to be able to measure height.

So we zap a bunch of horizontal lines

across the surface

each at a specific height.

The result looks sort of like a contour map

or a topographic map.

The shape of the lines

tells us the shape of the hill.

On a contour map

all of the points on the same line are,

by definition, at the same elevation.

In our map of Zoe's brain here

all the points on the same line

are combinations of Burritos and movies

that give Zoe

exactly the same amount of happiness.

For that reason we'd expect her

to be indifferent between two points

on the same line.

So we call those lines

indifference curves.

Now in case you only have a

two-dimensional notebook

instead of a 3D hologram to do your homework,

let's just look straight down

on this happiness map,

sort of like a drone

looking straight down on an actual hill.

We can focus just on those contour lines.

Why do we need these

to help Zoe find the highest point?

Well compare point A

which is one combination

of Burritos and movies

and point B which is another combination.

She has more movies and more Burritos

at combination B.

So it's obvious that she prefers B to A

but what about combination C,

that has way more movies

than combinations A or B

but also fewer Burritos than both.

Here's where we really need our

indifference curves.

They tell us the obvious

that B is farther up the hill than A

so she's happier at B than at A

but the indifference curves

allow us to see that for Zoe anyway,

combination C is preferred to A

but B is better than C.

We wouldn't have known that

without these indifference curves.

What's to keep Zoe

from going further and further up the hill

to higher and higher levels of happiness,

remember, each point on this plane

is a combination of

Burritos and movie tickets.

At point B, for example,

she's buying 10 movie tickets

and 20 Burritos per month

but at $9 for movie tickets

and $6 for Burritos

that comes to $210

which is more money than she has.

So the budget line we drew a few minutes ago

effectively becomes a fence

running across the hill.

Zoe's goal becomes getting

as high on the hill as possible

while staying inside the fence.

She would love to consume combinations

on the other side of the fence

like point B,

but she can't afford it.

Likewise, it doesn't make sense for her

to buy less than she can afford.

That would put her lower down the hill

than the fence.

If she wants to get as high up on the hill

and stay inside the fence

that is if she wants to get

the most happiness from her purchases

but can't exceed her budget,

then it makes sense

that she'll pick a spot

right up against the fence.

The question is where.

Well she could pick this point

but she could be higher on the hill

and still stay on her side of the fence

if she moved this way.

Likewise, here's another point

that's up against the fence

but it's lower than it could be.

Her solution is to find the one point

where an indifference curve

just barely touches the fence,

the point at which her indifference curve

is tangent to the budget line.

That's the highest point she can find.

Great! So how does she literally

make that point happen?

Again every point on this plane

is a combination

of Burritos and movie tickets.

So in this example

she buys six movie tickets

and 21 Burritos per month.

That comes to $180

and gives her the highest happiness possible

given her budget.

In short, consumers maximize their happiness

which we call utility

by finding the point

where their budget line

is just tangent to an indifference curve.

Then they make that point happen

by buying that specific combination

of the two goods.