Question

1. Explain what is meant in economic theory by consumer equilibrium.   
2. Discuss the conditions that would cause the demand for a good to
3. increase and (ii) fall as a result of a fall in the price of the good.

Use indifference curve analysis to support your answer

Answer 1

Consumer equilobrium is a 2 part theory. I part is the budget. The budget line represents affordable combinations of x and y that he can purchase with given income and goods prices. The indifference curve represents his choices he can buy with a particular combination to attain a level of utility. The tangent at which budget line meets IC is the consumer equilibrium. Slope of budget line is price ration and slope of IC is MRS. We equate these two to get the equilobrium for a consumer.

The inverse law of demand says that if the price of a good falls, the quantity demanded rises. So natirally they have an inverse relationship.

But if the price falls and quantity demanded also falls, direct relation is built. Such goods are giffen goods. They have a direct relation with price.