explain consumers equilibrium with the help of indifference curve
Dear student,
An indifference curve shows different combinations of two goods that gives same level of satisfaction to consumer.
A consumer is said to be in a equilibrium if he satisfies the following conditions:
1) MRSxy = Px / Py
2) MRS must be diminishing at point of equilibrium or indifference curve must be convex to origin.
In the figure given above, point E depicts consumer equilibrium. At this point, the budget line is tangent to the indifference curve. Observe that at this point the consumer's willingness to purchase (as given by the indifference curve) coincides with what the consumer can actually purchase (as given by the budget line). The optimum bundle is denoted by (x1*, x2*). This point is the optimum or the best possible point.
A consumer cannot buy any combination that lies right to the budget line because that will be out of his reach, with given income and prices of goods.
A consumer will also not opt to buy any combination that lies left to his budget line, although that will be within his reach but that combination will not give him that much utility that the combinations on budget line will give.
The consumer will attain highest utility at point P, because it is tangent to the budget line.
So, the consumer will be at equilibrium at point T because at this combination he is satisfying all the conditions of equilibrium, i.e. here, slope of budget line = slope of indifference curve, MRSxy = Px / Py and MRSxy is decreasing.
Regards
An indifference curve shows different combinations of two goods that gives same level of satisfaction to consumer.
A consumer is said to be in a equilibrium if he satisfies the following conditions:
1) MRSxy = Px / Py
2) MRS must be diminishing at point of equilibrium or indifference curve must be convex to origin.
In the figure given above, point E depicts consumer equilibrium. At this point, the budget line is tangent to the indifference curve. Observe that at this point the consumer's willingness to purchase (as given by the indifference curve) coincides with what the consumer can actually purchase (as given by the budget line). The optimum bundle is denoted by (x1*, x2*). This point is the optimum or the best possible point.
A consumer cannot buy any combination that lies right to the budget line because that will be out of his reach, with given income and prices of goods.
A consumer will also not opt to buy any combination that lies left to his budget line, although that will be within his reach but that combination will not give him that much utility that the combinations on budget line will give.
The consumer will attain highest utility at point P, because it is tangent to the budget line.
So, the consumer will be at equilibrium at point T because at this combination he is satisfying all the conditions of equilibrium, i.e. here, slope of budget line = slope of indifference curve, MRSxy = Px / Py and MRSxy is decreasing.
Regards