In economics, preference refers to the assumptions of a product’s alternatives, relating to the degree of satisfaction or utility that the product gives the consumer. Preference is how the consumer makes their optimal choice when deciding on which product to purchase. The individual's preferences are how the individual ranks a product against its competitors.
Indifference curves are used to measure preference and choice because they represent an ordinal measure of consumer taste and preferences, and show how the consumer maximizes utility by spending income¹.
Utility is an important concept in consumer preference and choice because it refers to the ability of the good or service to satisfy a consumer's want. An indifferent curve displays the different combinations of two goods that provide the consumer with an equal level or utility or satisfaction¹. It therefore shows the ranking or order of a good based on an individual’s satisfaction. A higher indifference curve shows a higher level of satisfaction and a lower indifference curve shows a lower level of satisfaction.
The marginal rate of substitution is a useful indication of consumer preference and choice. The marginal rate of substitution (MRS) shows the amount of one good that an individual is willing to give up for an additional unit of another good while still maintaining the same level of satisfaction¹. Understanding consumer preference and choice will provide an understanding to how consumer taste is measured, how the consumer maximizes satisfaction or reaches equilibrium, and the relationship between money and happiness.
1. Ragan, Chrisopher. Macroeconomics/Christopher T.S. Ragan, Richard G. Lipsey. – 13th Canadian ed.