When is a consumer in equilibrium?
A consumer is in equilibrium when he derives maximum satisfaction from the goods and is in no position to rearrange his purchases.
What is the second condition for consumer equilibrium?
The second condition for consumer’s equilibrium is that MRS must be diminishing at the point of equilibrium, i.e. the indifference curve must be convex to the origin at the point of equilibrium. Unless MRS continuously falls, the equilibrium cannot be established. Thus, both the conditions need to be fulfilled for a consumer to be in equilibrium.
What is equilibrium at tangency point?
At tangency point E, the absolute value of the slope of the indifference curve (MRS between X and Y) and that of the budget line (price ratio) are same. Equilibrium cannot be established at any other point as MRSXY > PX/PY at all points to the left of point E and MRSXY < PX/PY at all points to the right of point E. So, equilibrium is established at point E, when MRSXY = PX/PY.
What does the point E on the budget line mean?
All other points on the budget line to the left or right of point ‘E’ will lie on lower indifference curves and thus indicate a lower level of satisfaction. As budget line can be tangent to one and only one indifference curve, consumer maximizes his satisfaction at point E, when both the conditions of consumer’s equilibrium are satisfied:
What is an Indifference Map?
Indifference Map – shows the consumer’s preference scale between various combinations of two goods
Is the price of the goods X and Y fixed?
The prices of the goods X and Y are fixed for the consumer.
Is the budget line tangential to the indifference curve?
Notice that at this point, the budget line PL is tangential to the indifference curve IC3. Also, in this position, the consumer buys OM quantity of X and ON quantity of Y.
Where is the consumer equilibrium?
The consumer’s equilibrium under indifference curve analysis is found at the tangent between the budget line and a convex indifference curve. To find out the consumer equilibrium, the following conditions must be satisfied :
What is the equilibrium point of the consumer?
It means, that the consumer’s equilibrium point is the point of tangency of the budget line and indifference curve. At point D, the slope of the indifference curve and budget line coincides. Here,
What does it mean when the marginal rate of substitution of commodity 1 for commodity 2 is diminishing?
If at the point of equilibrium, the indifference curve is concave and not convex to the origin, then it will not be a position of permanent equilibrium.
What is the first condition of consumer equilibrium?
In short, the first condition of the consumer’s equilibrium is that the budget or price line should be tangent to the indifference curve. It means that the price ratio of commodity-1 and commodity-2 should be equal to the marginal rate of substitution of commodity-1 for commodity-2. 2. Indifference curve must be convex to the origin:
What is equilibrium in indifference?
Consumer’s Equilibrium in Indifference Curve Analysis is defined as a situation when the consumer maximizes his satisfaction, spending his given income across different goods with the given prices. Here, the indifference curve and budget line are used to determine the consumer equilibrium point. Indifference curve analysis helps to find out how the consumer spends his limited income on the combination of different goods to get maximum satisfaction.
What happens if the indifference curve is concave and not convex to the origin?
If at the point of equilibrium, the indifference curve is concave and not convex to the origin, then it will not be a position of permanent equilibrium.
Which curve must be convex to the origin?
Indifference curve must be convex to the origin.
What is consumer equilibrium?
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. The point of maximum satisfaction is achieved by studying indifference map and budget line together. On an indifference map, higher indifference curve represents ...
What is the second condition for consumer equilibrium?
The second condition for consumer’s equilibrium is that MRS must be diminishing at the point of equilibrium, i.e. the indifference curve must be convex to the origin at the point of equilibrium. Unless MRS continuously falls, the equilibrium cannot be established. Thus, both the conditions need to be fulfilled for a consumer to be in equilibrium.
What is equilibrium at tangency point?
At tangency point E, the absolute value of the slope of the indifference curve (MRS between X and Y) and that of the budget line (price ratio) are same. Equilibrium cannot be established at any other point as MRS XY > P X /P Y at all points to the left of point E and MRS XY < P X /P Y at all points to the right of point E. So, equilibrium is established at point E, when MRS XY = P X /P Y.
What does higher indifference mean?
On an indifference map, higher indifference curve represents a higher level of satisfaction than any lower indifference curve. So, a consumer always tries to remain at the highest possible indifference curve, subject to his budget constraint.
What does the point E on the budget line mean?
All other points on the budget line to the left or right of point ‘E’ will lie on lower indifference curves and thus indicate a lower level of satisfaction. As budget line can be tangent to one and only one indifference curve, consumer maximizes his satisfaction at point E, when both the conditions of consumer’s equilibrium are satisfied:
Where does consumer equilibrium exist?
From condition 1, we have known that consumer’s equilibrium exist at the point on indifference curve where budget line is tangent to the curve.
What are the conditions of consumer equilibrium?
The following are the conditions of consumer’s equilibrium. Budget line should be tangent to the indifference curve. At the point of equilibrium, slope of the budget line = slope of the indifference curve. Indifference curve should be convex to the point of origin. 1.
What is AB in a graph?
In the given diagram, we can see IC1, IC2 and IC3 are three different indifference curves and AB is a budget line. A consumer can only consume such combinations of goods which lie upon the budget line at a given income level and constant price of goods X and Y.
What is equilibrium in economics?
Every consumer aims at getting maximum satisfaction out of his given expenditure. A consumer is said to have attained equilibrium when he spends given income or budget in such a way as to yield optimum satisfaction, given the prices of two good s and the consumer’s preference. In simple words, a consumer is said to be in equilibrium ...
Which curve should be convex to the point of origin?
Indifference curve should be convex to the point of origin.
What is the indifference map?
The indifference map is based on the consumer’s preferences for the goods. The preference or habit of the consumer does not change throughout the analysis. The income of consumer is given and constant.
What is the rational consumer?
The consumer is rational and seeks to maximize his satisfaction through the purchase of goods.
How to derive a demand curve from an indifference map?
We can derive a demand curve from an indifference map by observing the quantity of the good consumed at different prices.
What is the indifference curve?
The indifference curve A shown here gives combinations of skiing and horseback riding that produce the same level of utility. Janet Bain is thus indifferent to which point on the curve she selects. Any point below and to the left of the indifference curve would produce a lower level of utility; any point above and to the right of the indifference curve would produce a higher level of utility.
How to maximize utility?
To maximize utility, a consumer chooses a combination of two goods at which an indifference curve is tangent to the budget line.
What is the horizontal intercept of the budget line?
The horizontal intercept of the budget line (point E) is the number of days she could spend horseback riding if she devoted her $250 entirely to that sport. She could purchase 5 days of either skiing or horseback riding per semester. Again, this is within her budget constraint, since: $50 x 5 + $50 x 0 = $250.
What is the point at which utility is maximized?
The point at which utility is maximized must be within the attainable region defined by the budget line.
Does the slope of the budget line change?
But does not slope equal the change in the vertical axis divided by the change in the horizontal axis? The answer, of course, is that the definition of slope has not changed . Notice that Equation 7.8 gives the vertical change divided by the horizontal change between two points. We then manipulated Equation 7.8 a bit to get to Equation 7.9 and found that slope also equaled the negative of the price of the good on the horizontal axis divided by the price of the good on the vertical axis. Price is not the variable that is shown on the two axes. The axes show the quantities of the two goods.
Can a consumer's choices be limited by the budget?
As we have already seen, a consumer’s choices are limited by the budget available. Total spending for goods and services can fall short of the budget constraint but may not exceed it.
What is the point of equilibrium where a consumer maximizes his satisfaction?
Therefore, E is a point of consumer's equilibrium where he maximizes his satisfaction. Point E is also called the"Optimum Consumption Point" where he consumes OX1 of X and OY1 of Y.
Is Indifference Curve IC3 affordable?
Bundles on the Indifference Curve IC3 are not affordable within budget.
