Date: 25.5.2020
We now come to the last part of the chapter.
Determining Consumer Equilibrium through Indifference Curve Analysis
Consumer Equlibrium 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.
Conditions of Consumer's Equilibrium :
1. MRSxy = Ratio of Prices
2. MRS continuouslly falls.
Thus, both conditions need to be fullfilled for a consumer to be in equilibrium.
The budget line is tangent to IC2 at point 'E' .This is the point of consumer equilibrium , where the consumer purchases OM quantity of commodity X and ON quantity of commodity Y
A ll other points on the budget to the left or right of point 'E' will lie on lower IC and thus indicate a lower level of satisfaction.As budget line can be tangent to one and only one indifference curve , consumer maximises his satisfaction at point'E' when both the conditions of Consumer Equilibrium are satisfied.
(i) MRS= Ratio of Prices: At tangency point 'E' , the absolute value of slope of IC (MRS between Xand 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.
(ii)b MRS continuouslly falls : The second condition is also satisfied at point'E' as MRS is diminishimg at point E, i.e. IC2 is covex to the origin at point 'E'.
Please go through the video link to understand the topic better
https://www.youtube.com/watch?v=PLeXPCXgV-g
We now come to the last part of the chapter.
Determining Consumer Equilibrium through Indifference Curve Analysis
Consumer Equlibrium 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.
Conditions of Consumer's Equilibrium :
1. MRSxy = Ratio of Prices
2. MRS continuouslly falls.
Thus, both conditions need to be fullfilled for a consumer to be in equilibrium.
The budget line is tangent to IC2 at point 'E' .This is the point of consumer equilibrium , where the consumer purchases OM quantity of commodity X and ON quantity of commodity Y
A ll other points on the budget to the left or right of point 'E' will lie on lower IC and thus indicate a lower level of satisfaction.As budget line can be tangent to one and only one indifference curve , consumer maximises his satisfaction at point'E' when both the conditions of Consumer Equilibrium are satisfied.
(i) MRS= Ratio of Prices: At tangency point 'E' , the absolute value of slope of IC (MRS between Xand 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.
(ii)b MRS continuouslly falls : The second condition is also satisfied at point'E' as MRS is diminishimg at point E, i.e. IC2 is covex to the origin at point 'E'.
Please go through the video link to understand the topic better
https://www.youtube.com/watch?v=PLeXPCXgV-g
KEVIN SUNIL PAPPAN 11B
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