00:01
So here we've got a question about preferences, right? and before we get into the marginal rate of substitution in detail, let's just draw a normal indifference curve, because that's how we think of preferences normally.
00:11
If i have two goods, x and y, we normally think of indifference curves as having this concave feature, right? along which every point on this line is associated with a same level of utility, right? curve, so all points are equal in terms, of the preferences of the people who are choosing them.
00:37
So the slope of the indifference curve, right, is telling you something about the marginal rate of substitution.
00:44
The slope tells you about the trade -off, right? when the slope is very steep, right, like where it is here, you have a lot of y, but very little x.
00:59
And the slope is telling you that you're willing to give up a lot of y to get a little bit more x, right? as you move down this indifference curve here, you are giving up a lot more units of y than you are getting units of x because you consider the units of x which are scarce to be more valuable, right? that's what the indifference curve is telling you, right? so that tradeoff is changing.
01:27
As i move along the indifference curve, the tradeoff is changing.
01:32
So the changing trade -off is telling you these things are imperfect substitutes at best.
01:48
Because if something is a perfect replacement for the other thing, if it is a totally perfect replacement, you can always replace one thing with the other.
02:00
It's only when something is an imperfect replacement that you can't replace it forever.
02:06
Eventually things start breaking.
02:08
Eventually, you become unhappy with the substitution, right? so a perfect substitutes relationship must feature indifference curves that are straight lines.
02:24
That's what indifference curves look like if perfect substitutes.
02:28
Because with a straight line, no matter when you go back and forth, no matter how much of one you have for the other, you can always still substitute at the same tradeoff, right? that's what makes it perfect...