Consumer Theory (Indifference Curves)
Preferences meet the budget constraint: utility maximization and where demand curves come from.
The Consumer Theory (Indifference Curves) model, in writing
Definition
The model of a consumer maximizing utility subject to a budget: indifference curves (preferences) meet the budget line (possibilities) at a tangency.
At the optimum: MRS = MUx/MUy = Px/Py
The intuition
Slide along your budget line until the rate you're WILLING to swap goods equals the rate the market LETS you swap them. Anywhere else, a cheap trade toward preference is being left on the table.
Exam tip
Price changes rotate the budget line; income changes shift it in parallel, decompose effects accordingly.
Related models in Advanced Micro