Explain Consumer’s Equilibrium with the Help of Indifference Curve Analysis

>> Saturday, January 23, 2010

Meaning of Consumer’s equilibrium

Consumer’s equilibrium is that point in which consumer consumes the combination of two goods by his limited income. He gets maximum satisfaction from these goods and never changes this situation. If he will change this point, his level of satisfaction will decrease.

We can explain consumer’s equilibrium with the help of indifference curve. Before explain this we need to understand following terms

Indifference curve

Indifference curve shows the combination of two goods which a consumer is consuming. For increasing one good’s one unit, he has to leave some quantities of other second goods. The sacrificing of second goods quantity will decreasing because, law of diminishing marginal rate of substitute will apply on it.

Income               apple ( 0.50 per unit )             orange ( Rs. 1 per unit ) 
Four rupees                  8                                         0
Four rupees                  6                                         1
Four rupees                  4                                         2
Four rupees                  2                                         3
Four rupees                  0                                         4

Condition of Consumer Equilibrium

Price line must be the tangent to indifference curve

It is not necessary that price line cut indifference curve, but it is important that price line must be tangent to indifference curve. Price line when touches indifference curve, then it means that Marginal rate of substitute of apple and orange will equal to the ratio of price of apple and orange .

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