Meaning of Indifference curve:- An indifference curve is that line of points which shows different combinations of two commodities which yield equal satisfaction to the consumer.
According to the leftwich:- “A single indifference curve shows the different combinations of X and Y that yield equal satisfaction to the consumer”.
In other words:- The combination Each of points represents equal satisfaction to the consumer on the indifference curve.
Consumer’s Equilibrium Through Indifference Curve Analysis
Every consumer would like to get maximum satisfaction out of his given expenditure. A consumer may find out his position with the help of indifference curve as to how much he should spend his limited income on the different goods so that he may get maximum satisfaction.
In other words:- Consumer’s equilibrium refers to that situation in which he is not willing to make any change on expenditure with his given income and given prices.
- Prices of the goods are constant.
- Income of consumers is also constant.
- Consumers know the price of all things.
- Consumers can spend his income in small quantities.
- Market contains perfect competition.
- Goods are classify as divisible.
The consumer’s equilibrium is found at the tangent between the price line and a convex indifference curve analysis
Two Main Conditions Of Consumer’s Equilibrium are
- Price line should be tangent to indifference curve
- Indifference curve should be convex to the point of origin.
- AB is a price line.
- IC1, IC2, IC3 are indifference curves.
- A consumer can buy any of the combination, C, D and E apple and Oranges shown on the price line AB.
- He can’t get any combination on IC3 as it is away from price line AB.
- He can buy combinations of those of goods which are not only on the price line AB.
- Out of C, D and E combinations, the consumer will be in equilibrium at combination D ( 2 Apple + 4 Oranges ) because at this point the price line ( AB ) is tangent to the highest indifference curve IC2.
- The consumer can also buy C or E combinations as well but these will not give him maximum satisfaction being situated on lower indifference curve IC1.
- It means the consumer’s equilibrium point is the point of tangency of the price line and indifference curve analysis
B) Indifference curve must be convex to the origin
It is the second condition of equilibrium that the indifference curve must be convex to the point of origin. It means that the marginal rate of substitution of good X for good Y should be diminishing. If there will be a point of equilibrium, the indifference curve will be concave and not convex to the origin, then it will not be a permanent position of equilibrium.
- AB is a price line.
- IC is an indifference curve.
- At point ‘E’ the marginal rate of substitution and price ratio of apples and oranges are equal. But point E is not a permanent equilibrium point because at this point, the marginal rate of substitution increases instead of diminishing.
- In other words, at point E, the indifference curve is concave to its point of origin ‘O’ so it is a violation of the second condition of equilibrium.
- So permanent equilibrium will not be permanent at point E.
- Thus, the consumer is in equilibrium at point E1 on IC1 Curve.
- At point E1, Price line AB is tangent to IC1 Curve. Which is convex to the points of origin.
Conclusion:- Thus, as per the above analyst consumer can be in equilibrium in the two conditions, when price line should be tangent to the indifference curve and Indifference curve must be convex to the origin.
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