Editing Indifference curve (section)

=== Application ===
[[File:Indifference curves showing budget line.svg|thumb|right|To maximise utility, a household should consume at (Qx, Qy). Assuming it does, a full demand schedule can be deduced as the price of one good fluctuates.]]

[[Consumer theory]] uses indifference curves and [[budget constraint|budget constraints]] to generate [[Supply and demand|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 constraint|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.<ref name="Lipsey 1975. pp. 182-186">{{Cite book|title=An Introduction to Positive Economics |edition=Fourth |first=Richard G. |last=Lipsey |author-link=Richard Lipsey|year=1975 |publisher=[[Weidenfeld & Nicolson]] | isbn=0-297-76899-9 |pages=182–186 }}</ref> 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.<ref name="Lipsey 1975. pp. 182-186"/> Stated precisely, a set of indifference curve for representative of different price ratios between two goods are used to generate the [[Price-consumption curve]] in good-good vector space, which is equivalent to the [[demand curve]] in good-price vector space. The line connecting all points of tangency between the indifference curve and the [[budget constraint]] as the budget constraint changes is called the [[expansion path]],<ref name="Salvatore">{{cite book |last=Salvatore |first=Dominick |year=1989 |title=Schaum's Outline of Theory and Problems of Managerial Economics |publisher=McGraw-Hill |isbn=0-07-054513-8 }}</ref> and correlates to shifts in demand.  The line connecting all points of tangency between the indifference curve and budget constraint as the price of either good changes is the price-consumption curve, and correlates to movement along the demand curve.
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