Question

Explain consumer’s equilibrium with the help of Indifference curve and budget line ? (8.75)​

Answer 1

Answer:

Consumer equilibrium refers to a situation, in which a consumer derives maximum satisfaction, with no intention to change it and subject to given prices and his given income. ... So, a consumer always tries to remain at the highest possible indifference curve, subject to his budget constraint.

Answer 2

Answer:

What is consumer's equilibrium ?

Consumer's Equilibrium implies a condition of most extreme fulfillment. A circumstance where a buyer spends his given pay buying at least one commodity, he gets the greatest fulfillment and has no inclination to change this degree of utilization, given the price of the commodities, is known as the consumer's equilibrium..

In an indifference map, the higher indifference curve represents the higher level of consumer's satisfaction than any lower indifference curve. So, a consumer always tries to remain at the highest possible indifference curve, subject to his budget constraint.

In an indifference map, the higher IC addresses the more significant level of consumer's satisfaction than any lower IC. Thus, a consumer generally attempts to stay at the most elevated IC, subject to his budget constraint.

Conditions of Consumer’s Equilibrium:

The consumer’s equilibrium under the IC theory must meet the following conditions:

(i) MRSXY = Ratio of prices or PX/PY

Assume that  the two goods be X and Y.

Therefore the first condition of the equilibrium is :

MRSXY = PX/PY

a. If MRSXY > PX/PY,  it implies that the purchaser will follow through on more for X than the price which is existing in the market. Thus, the consumer purchases a greater amount of X. So, MRS falls till it becomes equivalent to the proportion of prices and the equilibrium is laid out.

b. If MRSXY < PX/PY, it means that the consumer is willing to pay less for X than the price prevailing in the market. It induces the consumer to buys less of X and more of Y. As a result, MRS rises till it becomes equal to the ratio of prices and the equilibrium is established.

(ii) MRS persistently falls:

The second condition for consumer's balance / equilibrium is that the MRS should be lessening at the point of equilibrium , i.e. the IC must be convex to the origin at the point of the equilibrium.  Except if MRS ceaselessly falls, the equilibrium can't be laid out.

In this manner, both the circumstances should be satisfied for a consumer to be in balance / equilibrium.

Lets understand it clearly with the help pf a diagram .

In the figure below, $IC_{1} , IC_{2}$ and $IC_{3}$ are the indifference curves. AB is the budget line. With the requirement of the budget line, the most elevated IC curve, which a consumer can reach, is $IC_{2}$. This buget line is tangent to $IC_{2}$ at point E which is the equilibrium point. The consumer buys OM amount of commodity  'X' and ON amount of commodity 'Y'.