How do you find the consumer equilibrium using indifference curves and a budget constraint?
With the constraint of budget line, the highest indifference curve, which a consumer can reach, is IC2. The budget line is tangent to indifference curve 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.
How do you explain consumer equilibrium under indifference curve analysis?
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.
How is budget line connected with consumer equilibrium?
The slope is 1/2 throughout the budget line. 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. Thus, at equilibrium point, slope of budget line is equal to slope of the indifference curve.
What is indifference curve explain the consumer equilibrium with indifference curve?
Slope of indifference curve = Slope of budget or price line or MRSXY=PXPY. Also, at point E, IC2 is convex to the origin. Accordingly, equilibrium is stable. In a state of equilibrium, the consumer is buying OL amount of good Y and OM amount of good X. It is here that he is maximising his satisfaction.
What is price line or budget line?
This price line shows all those combinations of two goods which the consumer can buy by spending his given money income on the two goods at their given prices.
What is the consumer budget line?
Definition: A budget line is a straight line that slopes downwards and consists of all the possible combinations of the two goods which a consumer can buy at a given market price by allocating all his/her income.
When budget line and indifference curve are tangent that point is consumer’s equilibrium because?
The consumer is in equilibrium at a point where the budget line is tangent to an indifference curve, because it can not intersect the IC either from above or below.
How does the budget line and consumer equilibrium on the indifference map moves if the consumer’s income changes?
As shown in Fig. 3.12, when a consumer’s income increases, his budget line shifts parallel and upward and when his income decreases the budget line shifts downward. As the income changes, a new equilibrium is established and the consumer moves from one equilibrium point to another.
What is consumer equilibrium explain with diagram?
In this article we will discuss about the concept of consumer’s equilibrium, explained with the help of suitable diagrams and graphs. A consumer is said to be in equilibrium when he feels that he “cannot change his condition either by earning more or by spending more or by changing the quantities of thing he buys”.