Consumer Equilibrium – Marginal Utility and Indifference Curve Analysis
Below is a topic of Economics ‘Consumer Equilibrium – Marginal Utility and Indifference Curve Analysis’ for Class 12 based on the pattern of CBSE Class 12 Economics. Conditions of consumer’s equilibrium using marginal utility analysis and Indifference curve analysis of consumer’s equilibrium.
Consumer Equilibrium can be explained in two ways
1. Consumer Equilibrium in case of a single commodity
“Consumer equilibrium is the state of consumer’s demand which he thinks to be the best and which he does not want to alter” Prof Marshall
The law of consumer equilibrium is applied only when marginal utility and price of goods are the same. It is based on two factors
- Each consumer obtains maximum satisfaction by consumption of goods and services.
- Level of income is fixed at the given point of time.
With every successive unit, the consumer gets less satisfaction. At 6 units, the consumer is getting maximum satisfaction where Price=MU and at 7-unit MU of money is exceeding,
Consumer Equilibrium in case of a single commodity
Here purchase of a commodity depends on
- Price of the commodity
- Marginal Utility of money
- Marginal Utility of price.
- Equilibrium MUm =MUx/Px
2. Consumer Equilibrium in case of two commodities is represented in two ways
- Utility approach (cardinal analysis)
In this approach, consumer attain equilibrium in two conditions
a. When the price of the two commodities are the same or equal
The consumer will reach equilibrium only when MUx =MUy,
here consumers will attain equilibrium when MU of both the commodities say Y and X are equal and the price of both are the same.
b. when the price of the two commodities are different
The consumer will reach equilibrium only when MUx/Px = MUy/Py
For example, if MUx = 16 and Px = 2 at 6th unit and MUy, = 40 and Py = 5 at 5th unit Equilibrium will be attained at 6th unit of x and 5th unit of y i.e 8
ii. Indifference curve analysis (Ordinal approach)
This approach was propounded by Allen and Hicks. According to them, the utility cannot be measured in monetary terms. The consumer feels no difference between the various combination of commodities as long as consumer satisfaction remains the same.
An indifference curve shows the combination of two commodities for which the consumer is indifferent.
“A single indifference curve shows the different combination of X and Y that yield equal satisfaction to the consumer” Leftwich
As per the table and graph at all the combination of X and Y, Consumer gets the same level of satisfaction. The combination contains different quantity but the consumer gets the same level of satisfaction. The marginal rate of substitution decreasing from left to right.
Properties of Indifference Curve
Indifference Curve slopes downward, consumers prefer more goods to fewer goods.
MRS tends to diminish as the IC is convex to the origin.
IC never intersect each other
High IC represents a high level of satisfaction than the lower one.
Assumptions of Indifference Curve
- The consumer is rational. To maximize total satisfaction, he aims to attain the highest level of IC.
- IC is ordinally measurable.
- As per the preference, consumer arranges the various combination of goods. His choice is translative.
- The consumer is able to give rank to an indifference combination of two goods.
- To determine the equilibrium combination of two commodities is used.
- It is based on a diminishing marginal rate of returns.
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Tag: Marginal Utility And Indifference Curve / Conditions of consumer’s equilibrium using marginal utility and Indifference curve, / Class 12 Economics / Class 12 Economics Consumer Equilibrium / Consumer Equilibrium / Economics Consumer Equilibrium