Question

Explain consumer equilibrium using indifference curve approach​

Answer 1

here is the answer

Consumer's Equilibrium through Indifference Curve:

According to indifference curve approach, a consumer attains equilibrium under two conditions:

When marginal rate of substitution is equal to ratio of prices of two goods i.e., MRSxy = Px/Py.

MRSxy is continuously falling i.e., indifference curve should be convex to the origin.

Let the two goods be x and y as shown in the following Fig. E is the tangency point of budget line on indifference curve IC2. For this two basic tools — Indifference Map (i.e., set of indifference curves representing scale of preferences) and Budget Line (representing money income and prices of two goods) are required.

In Fig, we superimpose budget (price) line M on consumer's indifference map. Mind, indifference curves to the right represent progressively higher satisfaction. The aim of the consumer is to obtain the highest combination on his indifference map and, therefore, he tries to go to the highest indifference curve with his given budget line. He would be in equilibrium only on such point which is common to both the budget line and the highest attainable indifference curve. Here budget line M is tangent to indifference curve IC2 at point E.

In the Fig., E is the equilibrium point where both the conditions are fulfilled simultaneously. Mind, bundles on the higher indifference curve IC3 are not affordable because his income does not permit whereas bundles on the lower indifference curve IC1 give lower satisfaction. Hence the equilibrium choice is only at the tangency point E where consumer attains a state of equilibrium., i.e., maximum satisfaction. The equilibrium purchase is ox of good x and oy of good y on indifference curve IC2.

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Answer 2

Explanation:

Consumers equilibrium is the amount of goods the consumer can buy in the market given his/her current level of income.

There are two conditions for consumers equilibrium:

1) The first is that the budget line should tangent to the indifference curve or marginal rate of substitution of good X for Good Y (MRS

xy ) must be equal to the price ratio . i.e

MRSxy = Px/Py

2) The indifference curve should be convex to the origin at the point of tangency.