Consumers can always compare any two goods or products and decide if he/she prefers one of them or is indifferent between them. Now based on consumer preferences we can categorize various types of goods as follows.
Perfect Substitutes : When the consumer wants to substitute one product with another maintaining a constant rate of substitution e.g. one to one; the goods are known as perfect substitutes . The indifference curves of perfect substitutes have negative slope of -1 (constant). They are basically parallel straight lines.
In this context, let’s understand Marginal Rate of Substitution. Marginal rate of substitution for good X for good Y is just the amount of Y that the consumer has to give up in order to consume 1 unit of good X so that the utility level remains intact. Due to the assumption of monotonicity MRS always implies that the consumption of one good is reduced in order to get more of another good. The indifference curve for perfect substitutes has constant MRS of -1.
Perfect Complements : They are always bought together in fixed proportions. Examples can be cars and fuel or printer and paper etc. So to use one product we must buy another one. The indifference curves of perfect complements are ‘L’ shaped. At the vertex of the ‘L’ shaped curve the number of one product is equal to the other. For perfect complements MRS is either zero or infinite and not in between.
Bads : A bad is a commodity that the consumer simply does not like. Suppose someone is allergic to peanuts so peanut butter will be a bad commodity for him.
Neutrals : A good is a neutral if the consumer does not care about it. Suppose a consumer is neutral about tomato and loves pizza. So he basically does not care about how much tomato the pizza contains. The more pizza the better but adding more tomato does not bother him. Indifference curve for these goods are vertical lines. For neutrals MRS is infinite.
Q. If good X is neutral then what will be the marginal rate of substitution for good Y?
Ans. Zero because even if I am deprived of good 1 I will not need more of good Y to compensate as I am neutral about good 1.
More is Better : If a consumer always prefers more units of a commodity to less then that commodity will be called more is better. In this context, let’s consider a concept called ‘satiation‘. So there is a best bundle (of a commodity) for a consumer and the closer he is to that bundle in terms of indifference curve the better. However, if has too much of that good then that product becomes a bad for him. For example someone loves eating chocolates but when he overconsumes it he may get diabetic.