<Li> This assumption also set the stage for using techniques of constrained optimization because the shape of the curve assures that the first derivative is negative and the second is positive . </Li> <Li> Another name for this assumption is the substitution assumption . It is the most critical assumption of consumer theory: Consumers are willing to give up or trade - off some of one good to get more of another . The fundamental assertion is that there is a maximum amount that "a consumer will give up, of one commodity, to get one unit of another good, in that amount which will leave the consumer indifferent between the new and old situations" The negative slope of the indifference curves represents the willingness of the consumer to make a trade off . </Li> <P> Consumer theory uses indifference curves and budget constraints to generate consumer demand curves . For a single consumer, this is a relatively simple process . First, let one good be an example market e.g., carrots, and let the other be a composite of all other goods . Budget constraints give a straight line on the indifference map showing all the possible distributions between the two goods; the point of maximum utility is then the point at which an indifference curve is tangent to the budget line (illustrated). This follows from common sense: if the market values a good more than the household, the household will sell it; if the market values a good less than the household, the household will buy it . The process then continues until the market's and household's marginal rates of substitution are equal . Now, if the price of carrots were to change, and the price of all other goods were to remain constant, the gradient of the budget line would also change, leading to a different point of tangency and a different quantity demanded . These price / quantity combinations can then be used to deduce a full demand curve . A line connecting all points of tangency between the indifference curve and the budget constraint is called the expansion path . </P> <Ul> <Li> <P> Figure 1: An example of an indifference map with three indifference curves represented </P> </Li> <Li> <P> Figure 2: Three indifference curves where Goods X and Y are perfect substitutes . The gray line perpendicular to all curves indicates the curves are mutually parallel . </P> </Li> <Li> <P> Figure 3: Indifference curves for perfect complements X and Y . The elbows of the curves are collinear . </P> </Li> </Ul>

What is the value of an indifference curve to the economist
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