capital market ,consumption and investment

• as consumption increases the utolity of an individual will be increasing . the utility will be increasing but at a decrasing rate given that for higher level of consumption the increase in utility would be smaller .
• Indifference curve


  Represents the different possibilities of consumption today and consumption tomorrow
• Indifference curve


  • Along one indifference curve the utility of an individual will remain the same
  • When an individual moves from a lower indifference curve to a higher indifference curve, their level of utility will be increasing
  • Indifference curves never cross, they should always be drawn parallel to one another
  • At any point along an indifference curve, a straight-line tangent can be drawn which gives the slope or gradient, commonly termed the marginal rate of substitution
• marginal rate of substitution measures if the consumption today is reduced by 1 point by how much will consumption tomorrow be increasing.
• investment considered is mainly in the form of real asset eg a company setting up a new machine

  the slope of the investment opportunities curve is known as the marginal rate of transformation . it measures the increase in the level of the consumption tomorrow . when consumption today is decreased by 1 unit and that unit is used for investment.