Question

Define indifference curve approach and explain the conditions of consumers equilibrium

Answer 1

Hey here is the answer feel free to ask anything related to this question-

Indifference Curve

An Indifference curve is a curve which represents all the combination of two goods that give equal satisfaction to the consumer. It shows that consumer behaviour is indifferent towards all these combinations because they give him same satisfaction.

Three properties of Indifference curve:-

1) Indifference curve slopes downward to right.

2 )Indifference Curve is convex to origin due to diminishing marginal rate of substitution.

3) Higher Indifference curves represent higher level of satisfaction.

Consumer equilibrium:-

A consumer is said to be in equilibrium,when he is spending his given income on various goods in such a way that maximize his satisfaction.

Conditions of consumer's equilibrium:-

1) Consumer of equilibrium in case of a single commodity:- when the marginal utility of the commodity measured in terms of money is equal to its price.

Symbolically,

• MU_{X =} P_X
• Marginal Utility decreases with increase in quantity consumed.

2) Condition of consumer equilibrium in case of two commodities:-When the ratio of the marginal utility of two goods and their price is equal.

• MU_X/p_X = MU_Y/p_Y
• Marginal Utility decreases with increase in quantity consumed.

This is however subject to the budget constraint that the money spent just equals income, i.e., P_X * Q_X + P_Y * Q_Y = M.