Question

graphically show consumer equilibrium and producer equilibrium

Answer 1

Answer:

By now, you are clear about indifference curves and the budget line. Let’s look at consumers equilibrium next. A consumer is in equilibrium when he derives maximum satisfaction from the goods and is in no position to rearrange his purchases.

Browse more Topics under Theory Of Consumer Behavior

• Nature and Classification of Human Wants
• Marginal Utility Analysis
• Consumer Surplus
• Indifference Curve

Assumptions

• There is a defined indifference map showing the consumer’s scale of preferences across different combinations of two goods X and Y.
• The consumer has a fixed money income and wants to spend it completely on the goods X and Y.
• The prices of the goods X and Y are fixed for the consumer.
• The goods are homogenous and divisible.
• The consumer acts rationally and maximizes his satisfaction.

Consumers Equilibrium

In order to display the combination of two goods X and Y, that the consumer buys to be in equilibrium, let’s bring his indifference curves and budget line together.

We know that,

• Indifference Map – shows the consumer’s preference scale between various combinations of two goods
• Budget Line – depicts various combinations that he can afford to buy with his money income and prices of both the goods.
• In the following figure, we depict an indifference map with 5 indifference curves – IC1, IC2, IC3, IC4, and IC5 along with the budget line PL for good X and good Y.

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Answer 2

Answer:

In this article we will discuss about the concept of consumer’s equilibrium, explained with the help of suitable diagrams and graphs.

A consumer is said to be in equilibrium when he feels that he “cannot change his condition either by earning more or by spending more or by changing the quantities of thing he buys”. A rational consumer will purchase a commodity up to the point where price of the commodity is equal to the marginal utility obtained from the thing.

If this condition is not fulfilled the consumer will either purchase more or less. If he purchases more, MU will go on falling and a situation will develop where price paid will exceed MU. In order to avoid negative utility, i.e., dissatisfaction, he will reduce consumption and MU will go on increasing till P = MU.

On the other hand, if MU is greater than the price paid, the consumer will enjoy surplus satisfaction from the units he has already consumed. This will induce him to buy more and more units of the commodity leading to successive fall in MU till it is equated to its price. Thus, by a process of trial and error — by buying more or less units, a consumer will ultimately settle at the point where P = MU. Here, his is total utility is maximum.

However, P = MU is a necessary but not a sufficient condition for a consumer’s equilibrium. In Fig. 4, we find that the MU curve is intersecting the price curve PP at two differ­ent points M and N. So far M is concerned, although by having OA quantity the consumer is reaching the point where P – MU but it is not equilibrium.

For by purchasing extra units above OA he can enjoy surplus satisfaction. Why then will he stop at OA? He will continue using the thing till he reaches OB. If he goes beyond this point, for every extra unit P is greater than MU and he shall have to suffer dissatisfaction. Thus, the sufficient condition of consumer equilibrium is that the MU curve must cut the price curve at its downward segment and not at its rising segment.

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