Final answer:
An indifference curve represents combinations of goods that provide the same level of utility to a consumer. They show the tradeoffs between two goods and slope downwards, reflecting diminishing marginal utility. The best feasible combination of goods lies where the budget constraint is tangent to the highest attainable indifference curve.
Step-by-step explanation:
An indifference curve represents bundles of goods that a consumer finds equally satisfying, providing the same level of utility or happiness. Such curves are utilized to demonstrate the tradeoffs between two goods that a consumer faces, within the constraints of their budget. On a graph, all points located on the same indifference curve indicate combinations of goods among which the consumer is indifferent, because each point yields the same level of utility. As an example, if a consumer finds equal satisfaction between having more doughnuts and fewer books, or vice versa, these combinations would lie on the same indifference curve. However, consumers tend to prefer diversity, hence a combination of goods, such as some doughnuts and some books, often leads to a higher utility level than extreme points with only one good.
Higher indifference curves represent higher levels of utility and they slope downwards due to the principle of diminishing marginal utility. This principle states that as a person consumes more of one good, the added satisfaction from consuming more of that good decreases, hence making other goods relatively more attractive. An indifference curve is steeper when consumers place a higher relative value on the good on the vertical axis and flatter when they place a higher value on the good on the horizontal axis. Choosing the best combination of goods depends on the consumer's budget constraint and their preferences reflected in the shape of indifference curves.