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I am a software engineer studying business finance for the first time. I am really struggling with this chart. It's supposed to be the "two period model" showing the complete consumption tastes and preferences of individuals in a two-period world.

What gets me is that both the X and Y axes are marked as being $.

Can you please explain what the chart is actually showing? What does each point in the curve actually represent, and why/how does so?

ADDED: After reading the wikipedia page about it, I understand that the curve is meant to plot the points where a person is satisfied. So, it might have more of X and less than Y and still be happy -- or vice versa. So, I guess this is now applying the same concept but rather than having two different products, it's the amount of money in two different periods... am I on the right track?

Investment chart

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    $\begingroup$ It is correct. Think of the curves as level curves with higher being to the northeast. $\endgroup$
    – Stéphane
    Commented Mar 1, 2020 at 1:38
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    $\begingroup$ BTW that chart was invented by Irving Fisher in his book The Theory of Interest (1930). Still interesting to look at 90 years later. $\endgroup$
    – nbbo2
    Commented Mar 1, 2020 at 10:20

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Consider a line through the scatter plot of X and Y, where the points are such that X+Y=10. i.e., if you plot the points {1,9}, {2,8}, {3,7},…,{9,1}, and draw a line through these points, you will get a downward sloping straight line. So this line represents the combination of X and Y such that the total amount is 10. If these represent the value of two assets, you will be indifferent between the points on this line as the total value is the same.

Next consider the points X and Y such that X+Y=20. You will get a straight line, which will be to the right of the previous line. Again you will be indifferent between the points on this line as they represent the same value of 20. But you would prefer a position on this line compared to a position on the previous line where X+Y=10.

The curves you have represent the same concepts but in terms of utility as opposed to value. The shapes of the indifference curves could be straight lines (where the goods are perfect substitute as in the value example above) or L shape (for complementary goods), or curved (for most goods). The axes are usually the quantity/number of units of the two goods.

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    $\begingroup$ Thank you! And thank you for not mentioning I should stick with software :D (Or maybe have a change of career and get into house cleaning...) $\endgroup$
    – Merc
    Commented Mar 1, 2020 at 2:15
  • $\begingroup$ You will be all right once you advance through the book. It sounds strange only because they try to explain mathematical concepts qualitatively, but as you go through the topics, you will see more maths and you will be at home soon! $\endgroup$
    – Magic is in the chain
    Commented Mar 1, 2020 at 14:33
  • $\begingroup$ "in terms of utility " do you mean in terms of how useful they are to you? $\endgroup$
    – Merc
    Commented Mar 1, 2020 at 22:49
  • $\begingroup$ The classic meaning is in terms of 'satisfaction', but value/usefulness would do as well! $\endgroup$
    – Magic is in the chain
    Commented Mar 1, 2020 at 23:25

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