5.16 : Consumer Choice I

Consumer choice involves choosing a combination of products that provide the highest level of satisfaction to them within their budget. It takes into consideration the consumer's limited budget and their preferences.

Neil spends his monthly income on two products, Good X and Good Y. The Budget Line, BL, shows all possible purchasing options.

Using these same axes, Neil's preferences can be presented in another graph.

His preferences for monthly consumption of Good X and Good Y are represented by indifference curves, IC1, IC2, and IC3. The bundles lying on IC1 provide a certain level of satisfaction to Neil. The higher curves, IC2 and IC3, indicate greater satisfaction achieved by purchasing larger quantities of both goods.

The two graphs can be combined.

By purchasing larger quantities of the two goods, Neil can move on to higher indifference curves and get greater satisfaction.

However, his budget limits the amount of goods he can purchase.

So, Neil needs to find an optimal bundle that provides maximum satisfaction while staying within his budget.