Consumer Equilibrium by Indifference Curve

Consumer’s Equilibrium through Indifference Curve Analysis:

Since a consumer encompasses a limited income, he spends it in such a way so as to acquire maximum level of satisfaction. He will achieve equilibrium whenever he acquires maximum satisfaction from his expenditure on various goods. Under the utility analysis elucidated former, a consumer acquires maximum satisfaction whenever marginal utilities from his various purchases are equivalent. We can also elucidate the equilibrium of the consumer with the help of the indifference curve analysis. For our analysis, we have to make the assumptions shown below:

(a) The consumer has prior to him an indifference map for a pair of goods state, tea and biscuits. This map symbolizes the preferences of the consumer for the two goods. It is supposed that his scales of preferences stay constant at a specified time.

(b) The consumer has a fixed sum of money to spend on two goods. It is supposed that he will spend the sum on both the goods and not save any portion of it.

(c) The prices of such goods are specified in the market and are supposed to be constant.

(d) The consumer is supposed to act rationally and maximize his satisfaction.

The consumer’s indifference map for good X Y is specified in figure below; it symbolizes four scales of preferences of a consumer for two goods. Indifference curves to the right symbolize higher satisfaction. The consumer would like to select a combination of good X and good Y that will be on the highest indifference curve. However his choice will depend upon his income and the price of two goods.

To understand the extent of buy goods with specified prices and income of the consumer, budget line is significant.

 

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