Thursday, December 27, 2012

Indifference Curve explaining the concept of consumer’s equilibrium

Indifference Curve explaining the concept of consumer’s equilibrium
Reviewed by Hammad Naziron Apr 01 2013
Rating: 5

How Indifference Curve is used in explaining the concept of consumer’s equilibrium?
Let us discuss them:

Equilibrium of the consumer:
In order to explain the consumer’s equilibrium with the help of indifference curves, we make the following assumptions.
 
Assumptions of the Indifference Curve:

  • The consumer purchases two commodities x and y for which he has various combinations. His scale of preferences for the various combinations of these two goods does not change in the analysis.
  • The consumer has a fixed amount of money.
  • The prices of two goods x and y in the market are given and constant.
  • The goods are substitute of each other and divisible.
  • The consumer acts rationally.
Equilibrium of the consumer:
The consumer will be in equilibrium position where the price line or income line is tangent to the indifference curve.

Equilibrium of the consumer with the help of a Diagram:
In this diagram there are three indifference curves, IC1, IC2,IC3.
AB is the price line or income line. Now P is the point where the indifference curve IC2 is tangent to price line. This is consumer’s equilibrium point. Here he purchases OE of y commodity and OH of x commodity and getting maximum satisfaction.
No other point will yield maximum satisfaction. E.g. if consumer purchases at point T. at this point the consumer has to substitute PR amount of y commodity. To get RT amount of x commodity. But during this purchasing process he cannot go beyond AB line. so when he scarifies PR amount of ‘y’ he will get only “RS” of x commodity, so he will be a loser. Similarly indifference curve IC3 is beyond the reach of the consumer. So the consumer will be in equilibrium only at the point where IC2 is tangent to price line.

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