Consumer's Equilibrium with the Help of Indifference Curve Analysis

The aim of the consumer is to get maximum satisfaction. With the help of indifference curve we can find out how a consumer should spend his limited income on various pairs of goods so that he gets maximum satisfaction. 

First of all, what is consumer equilibrium?

Consumer equilibrium is the situation in which a consumer spends his limited income to buy goods and services at a fixed price in such a way that he gets maximum satisfaction. This is a position which he does not want to change at any cost.

its beliefs

1. commodity prices are stable

2. Consumer income is stable

3. The consumer has full knowledge of the cost of every product.

4. The consumer can spend his income in small amounts.

5. The consumer is considerate.

6. There is perfect competition in the market. 

7. Items can divide in small parts 

 The price line must be traced in order to attain the position of consumer equilibrium. The price line is also called the budget line. It is also called potential consumer line.

Know about Price Line 

Price line is the line which shows the points of pair of  the goods quantity which can be bought by spending all the income.

Suppose the income of the consumer is Rs.400, he wants to spend his income on bananas and oranges. The cost of an orange is Rs 50 and that of a banana is Rs 100 per kg.

So in the following way he can buy

income

400 rupees

Oranges 8 kg

Bananas 0 kg

400 rupees

Oranges 6 kg

Bananas 1 kg

400 rupees

Oranges 4 kg

Bananas 2 kg

400 rupees

Oranges 2 kg

Bananas 3 kg

400 rupees

Oranges 0 kg

Bananas 4 kg

When we show it on the curve it makes a price line like this

slope of price line = Px / Py

Px = X Cost of the article Py = Y Cost of the article

A consumer will be equilibrium at the point on the price line when this price line is tangent to an indifference curve.

And this indifference curve should be convex from the origin.

In this way we can say that it has two conditions

1. The price line should be a tangent to the indifference curve i.e.

MRSxy = Px/Py

Marginal rate of substitute of Xand Y = Price X X Price Y

Marginal rate of substitute means that if the consumer wants the same level of satisfaction to remain the same, then he has to sacrifice the quantity of oranges to get the quantity of bananas.

The amount of oranges sacrificed to increase a quantity of banana will be the marginal substitution rate of the banana

Like sacrificing 2 oranges for 4 bananas is so maras = 4 : 2.

2. The indifference curve must be convex from the origin

remember

An indifference curve is one where each point represents a pair of goods with which the consumer gets equal satisfaction.