Chapter 4

CONSUMER'S EQUILIBRIUM
INDIFFERENCE CURVE ANALYSIS

IC Analysis as Different from Utility Analysis

Assumptions of ICAnalysis of Consumer's Equilibrium
Indifference Set and Indifference Curve
Features/Properties of Indifference Curves
Consumer's Budget (Budget Set and Budget Line)
I Optimum Choice of the Consumer:
Consumer's Equilibrium

1. ICANALYSIS AS DIFFERENT FROM

UTILITY ANALYSIS
In the previous chapter, we discussed consumer's
equilibrium with
reference to utility analysis. The basic limitation of utility analysis is that
it is based on the assumption of cardinal
utility can be expressed in terms of cardinal measurement
of utility: that
numbers like 1, 2, 3,etc.
The IC analysis of consumer's
equilibrium
Instead, it is based on the concept of ordinaldiscards this assumption.
According to this concept, utility is only ranked measurement of utility.
as high or low (more or
less). It is never expressed in terms of
units like 1, 2, 3, etc.
2.
ASSUMPTIONS OF IC
ANALYSIS
OF CONSUMER'S EQUILIBRIUM
analysis of
consumer's
assumptions: equilibrium is based on the
following
(i)
Money income of the consumer is given and does not
(in) The change.
consumer spends his income on such goods which can
Substituted for each other, like apples and be
oranges.
 Introductory Microeconomics

(iii) The consuner's preference (or scale of preference) for the

is well defined. Generally speaking, his intensity of desire
would increase when he has less of it. Likewise, his
for a good would decrease when he has more of it. intensity of desire
the
(iv) More of a good always gives more satisfaction to
is called'monotoníc preference for a good, (The Consurner.is masThia
assumption
to simplify the description of ICanalysis.)
(v) The consumer ís rational. He always maximises his satisfaction.
e 3. INDIFFERENCE SET AND
INDIFFERENCE CURVE
Consider a sítuatíon when a consumer is spending his given income ac
goods Aand B. Let Good-A be apples, and Good-B be oranges. Consider
these goods as substítutes of each other.
Setmang Tabular Presentation
Consider Table 1,showing different combinatíons of apples and orangs.
Jnti esKe Sets Table 1. Different Combinationsof Apples andOranges
Oopn ploto
Combination Number of Apples NumberCof Oranges
cuzve A 10

B 2 7

C 3 5

D 4 4

Observations
Note the following observations relating to Table 1:
(i) Combinations A,B, CandD are specified by the consumer accordin
to his scale of preferences for the two goods.
(ii) Each combination offers the same level of satisfaction
satisfaction.
the consumer, So that (in terms of the level of
Combination A= Combination B= Combination C= CombinationD
(iii) As there is no difference among combinations A, B, Cand D, W
Combinatio
may say that the consumer is indifferent across these
of tSet'
Together, these combinatíons form an Indifference
Consumer.

106
 Gonsumer's Equitibriumndifference Curve Analysis

tereKe set is a set of ttose combinations of two goods which offers the
FOCUS
eosue the same level of satistaction, S0 that, the cOnsumer Is Indifferent ZONE
OSsall (Mbations in his lndifference set.

Diagrammatic Presentation
FIGURE
Dagrammatic presentation of Table l gives the following curve:

lndifference Curve
(Dlagrammatic presentation
Oranges of lndifference Set)

Apples
ICIs an tnditference eurve.Each point enthe eurve shows
a combinatlon ef two goods, ofering the same level of
satlsfactlon to the consumer, Thus, level of satisfaction of
the consuumer at polntAIs the same as at points B, Cor D,

Each point on the curve (like A, B, C, ..)shows one combination of two

gnds (apples and oranges). Since each combination oflers the same level
ofsatistaetionto a consumer, this curve is called inditference curve.

lndifferenee curve is a diagrammatic presentation ofan indifference set of a consumer FOCUS

t showsditferent combinations of two commodities (like apples and
the sarme level of satisfactlon to the consumer. oranges)offering ZONE

4. FEATURES/PROPERTIES OF
INDIFFERENCE CURVES
tollowing are the principal features/properties of indiflerence curves.
WeSlopes
IC
Downwarda lways meang negaive sopeX viCe veSa
slopes downward from left to right, It means that IC has a negative
Sope. ft inmplies that ifthe consumer
he must have less of the decides to have more of one good,
WOuld remin constant at other, is only then that the satisfaction level
It
ditlerent points of the I
107
Ottodtory MicrGCOnOTic

Let relertoig 2.
At point Aonthe IC,the conner has 5oayges,and 2
apples.
ron Aton, he has apples (one more than betore)and
than bedore).
When the consumer moves from point Ato B, andI|he has
oranges{21
instead of 2, his satisaction level ffrom apples must rise.
(in tems of satistaction leve), he must consume less of A Since
that the rise in satistaction level (due to higher consumption e
is counter balanced by the fall in satisfaction level (due ofto apples
FGURE
oranges,
onsumption of oranges). lower
ICslopes downward, or it shows a negative stope

2
Since consumption of two goode
is inversely related, 1C must haw
Oranges negative slope.

X
Apples
Satisfaction level at A Satisfactlon level at B. Because Aand B
Moving from Ato Bwhen the consumption of apples increases,
consumption of oranges mustdecrease. Only then the
satisfactlonlevel can reman constant between points A and B.
Since Consumptionof two g00ds on the ICis
inversely) related, 1C must slope downward. negatively
(or
3FIGURE
Slope of IC: Algebralc Expression
Slope of C- AY
AX
AB Good-Y
-o 3 AY

IConsumptionofoneadditional
nit of Good- X involves a
B\AX
sacrifice of 2units of Good Y]
Since consumption of two goods is inversely
related, IC must have negative slope, or it
ust slope downward, Good-X
HOTS

i) 1C is Convex to the Origin

gaad fr he oha.
Whr should MRSdecline
URS

iminishing maginl ity.

hisintensity of desire for Good-Y tãs to risehat T
NES Ts he a
Ui ofGood-Y tenis to Tise wi every
sacriiced aioonawiat an wilin sarie Gaat
tisbecaRse of this, for eveT SOccesSive nit of Good-XÖ cnsn
is wling to give up less and less amount of Good-Y.
Acooring,
(sacribcing Yper unit of a3iional X temds to l as weDoe dowA
the 1C. Tbus, IC is covex to the origin because MRStens to
dene.
Fig 4ustrates this point.
Between pointsAand B, the consuner is wTing to gve p L5
isa BRAN
Good-Y fo l more unit of Good-X Sothat MRS = AY TEASER
But, 2s we move dow
C,t the curve, we ind that between points Band
the consumer is
willing give up 1.5 units of Good-Y only when
De gets 2 units of Good-X
to
in return for 0.75 units of
Good-Y are given
p ior 1more unit of AY
Good-X. So that, MRS = - AX L5 =0.75
Lkewise, between points C and D. AY = 05 and AX= 2, so that
MRS = AY 0.5
AX) 0.25. MRS
his because of As CoMENan
the diminishing MRS that ICis conveT to the origin.
introductoryMicroeconomics
AFIGURE
the originImplying diminishing MRS
ICis convexto

AY=1.5
A
Diminishig Mg
Good-Y
4.5
3 45
AX=1

D 7
2.5 IC
2.5-5
MRS AY

6 7
1 3 4

Good-X
1.5
"Between points A-B, slope of IC =-A=--1.5
AX
(or MRS =-1.5)
1.5
Between points B-C, slope of IC = AY 2 =-0.75 (or MRS =-0.75)
AX
"Between points C-D, slope of IC =-=-=-0.25 (or MRS =-0.25)
AX
Declining MRS lead to convexity of IC.

IC is Covex to the Origin AY

FOCUS Yes, IC is normally convex to the origin. It is because MRS= AX tends to decline as we
ZONE move along the curve, left to right.
AY
Note that is identical with the slope of IC. So that declining MRS means that the
slope of ICtends to decline as we move down this curve.
Also note that it is the declining MRS that makes indifference curve as convex to
the convexity.
the origin, Higher the MRS, greater

(ii) Higher IC shows Higher Level of Satisfaction

Aset of ICs drawn in a graph is
FIGURE
DecaYSe Fig. 5shows aset of indifferencecalled Indifference Map.
curves one above the other.
tmookonic
pocteerce Good-Y
Indifference Map

ICA

" Higher IC shows higher level of Good-X

ICs need not be parael to each satisfaction
" ICs never touch or otther.
intersect each other.

110
 Consumer's Equilibrium-Indifference Curve Analysis
With reference to Fig. 5, tollowing observations need to be carefully noted:
Hicher c(tothe right and above another 1C) indicates higher level of
atisfaction. Thus, 1C, indicates higher level of satisfaction than 1Cy;
C. indicates higher level of satisfaction than 1C, and IC, indicates
higher level of satistaction than IC,.
Each IC in the indifterence map corresponds to different level of
consumer's income. Higher 1C corresponds to higher level of income.
HOTS FIGURE
o
o. Show that higher IC offers higher level of satisfaction.
Ans. Refer to Fig. 6.
Higher IC means
Consider points R (on the lower IC) and higher levelof
S(on the higher IC). satisfaction
Both at R and S, consumer has OK Good-Y
R
(same) amount of Good-Y. But at S, the
consumer has OL, amount of Good-X
which is greater than OL (the amount of
Good-X at point R).
We know, more of a good means
more satisfaction owing to monotonic
X
preferences. L1
Hence, the conclusion that IC, offers Good-X
higher level of satisfaction than IC,.

(iv) ICs do not Cross or IntersectEach Other

What, if they do? Well, we do not get logical results, i.e., the result willNbe
FIGURE
a paradox or a contradiction. Fig. 7 illustrates how.
Y Changes in IC
A=B (being on the same IC,)
A=C (being on the same IC,) (i) Movement along the
Good-Y B=C. But this is not logical. same 1C: It indicates
At C, consumption of Good-X is higher consumption of
greater than at B, while the one good followed by
consumption of Good-Y is the lower consumption of the
same (at B and C).
A other in order to keep the
satisfaction level same
as all points on same
B IC offer same level of
satisfaction.
IC1
(ii) Shift from a Lower to
+X aHigher IC: It indicates
Good-X choosing a new bundle of
two goods which involve
more quantity of atleast
Consider points A and B. These are on the same IC,. Therefore, these one good and same of
equal in terms of the level of satisfaction, So that A = B. Likewise the other implying higher
A = C,as these are on level of satisfaction.
the same IC,.
Since A=B and A=C, we can conclude that B = C. But this is not
8cal. Because: at both Band C, the consumption of Good-Y is the
IntroduUCtory Microeconomics

same (= OK). But at C, the consumption of Good-X

than at B( KB). Implying that C must be (= KC) is greater
offering
satisfaction than B. higher level
(v) ICdoes not touch X-axis or Y-axis
This is because IC analysis considers the
simultaneously. consumption of two o
Observations related to 1C If IC touches Y-axis (as in Fig. 8), it
IC Slopes Downward: of Good-X is zero.
would mean that the consumni
Increase in consumption
of one good is followed by Likewise, if IC touches X-axis (as in Fig. 8), it would mean that the
decrease in consumption
of the other. consumption of Good-Y is zero.
ICis Convex to the Origin:
Due to falling MRS.
Higher ICshows Higher
Level of Satisfaction: Due
to monotonic preferences.
IC's do not intersect each 8 " Touching Y-axis, IC would mean
other: As it will result in a A-poo zero consumption of Good-X
paradox.
IC does not toUch
"Touching X-axis, IC would mean
zero consumption of Good-Y
X-axis or Y-axis: Owing
to the consideration
that 1C analysis involves IC,
consumption of two goods
simultaneously. ICz ’X
Good-X

TEST YOUR UNDERSTANDING

Q. The table given below shows Shyam's preferences for Study (S) and
using various combinations of the two choices between which he is Entertainment
(E), by
three sets of bundles represent different utility level.
indifferent. Each of the
Table showing Shyams preferences for Study (S) and Entertainment (E)
Combinations SET-1 (1C) SET-2 (IC,) SET-3 (1C,)
E S
A 2 40 10 45
40 12
B 34 39
12 35 14
8 26 14 34
30 16
D 12 21 30
17 25 18
E 17 16 25
20 20 21
22 12 25 20
16 27
30 30 15
13 37
H 40 13
38 10 44
50 50
12
50
 MicroeConomics
oductory
JFOCUS
ZONE

Consumer K2 (briefly
incomeBudget
and a
Budget
the Here, Illustration
=Quantity Observations Note: Presentation
Tabular CONSUMER'S 5.
Accordingly,
andshows and Let BUDGET
Set P set can it) it).on 10 60 it.of lf Good-1
Unitsof Good-1
can =
combinations
Likewise, Alternatively, On us (BUDGET
is refers
of buy, and × units consumer a budget This prices price
buy also Price
of consumer.the the assume
30 20 10
Good-2; 20
Also,=20 2 consumption and
a
called attainable togiven of
other budget of
set of you units =60; of
it.
of Good-1;
Y can he Good-1 Good-2
weGood-2.
Budget
two his can hand, spends Table that
= on a set find
Total of PCood-1 SET
goods The incomethink consumer
combinations Good-2 buy it) is is a
Constraint
expenditure X, budget if his drawn 2. and
possibilities the consumer
and he Good-2
Unitsof
Budget Also,
with =PX, 20 = AND
and of entire following
Good-2. 1
(spending 40 spends per
his Quantity + set various units 2 20 40 60 assume
it PX,equation prices units can per on
given as of income the Set unit.
or unit
shows total s of buy his nasBUDGET
income. of Y set other
of Good-1 assumptions of for
budget
20
of entire
and that
Good-1;
budget. of
Good-1 Good-2 10 the the a
twO x1= on budget
limit PGood-2 2 2 2x 2 price
(spending-40 on Good-1,
units income on x x x0Consumer Consumer,
goods, 30 20 10 set
(constraint) PriceP,= called and (spending + + Totalor
+ + Expenditure
that
= 1x0 1x 1x 1x
of of LINE)
20 of Spending
Total
BudgetgivenGood. 20 40 60
the Good-1 of
he consumers = =0 ?
on Good-1
20 per l 60 = = consumer. 60
that it). x2 can 40 20 + given
up 40Good-2, unit] +0
+ + 60
toGood2of a buy is to
= 20 40 =
his
Equationprices of
which 30 income
60 =60 =60 60 2 he
the go ds consumer x1=?40(spending he income
gets Th peruni
 Consumer's Equilibrium-Indifference CUrve Anatysis

HOTS
Q. What can lead to achange in budget set?
Ans. Budget set depends on P, (Price of Good-1), P, (Price of Good-2), and Y(Consumer's income).
Change in any of these variables will lead to a change in budget set.

Diagrammatic Presentation
Diagrammatic presentation of the data-set of Table 2 offers a budget line,
as in Fig. 10, FIGURE
Budget Line of the Consumer Observations related to
Budget Line/Price Line
60 a Budget Line It Slopes Downward:
or
This budget line corresponds to the Increase in consumption
50 following equation, called Budget Line 10 of one good is followed by
Good-2 Price Line Equation: decrease in consumption
40 P,X;+ P,X,=Y of the other.
Y:Total expenditure or total budget. Slope of Budget Line/
30 P,: Price of Good-1. Price Line Price ratio of
X,: Quantity of Good-1. 2 goods
20
P,: Price of Good-2.
X,: Quantity of Good-2. i.e.
10 Equation of budget ine is
expressed as:
X
20 30 PX, +PX,=Y.
Good-1

This budget line is drawn on the assumptions that

price of Good-1 is 2per unit, price of Good-2 is1
per unit, and the consumer has 60 to spend.
Accordingly, maximum 30 units of Good-1 are
purchased when entire budget is spent on Good-1l and
maximum 60 units of Good-2 can be purchased when
entire budget is spent on Good-2.

Why is line ab (in Fig. 10) called Budget Line?

Because, a consumer with his given income of 60 can buy 30 units of
Good-1 or 60 units of Good-2, or other possible combinations on the
line ab.
tach point on the line ab indicates one combination of Good-1 and
Good-2 which a consumer can buy with his given income, and given
the prices of Good-1 and Good-2.

e une is a line showing different possible combinations of Good-l and Good-2,

na consumer can buy, given his budget and the prices of Good-l and Good-2. FOCOS
Anywhere, on the budget line, aconsumer is spending his entire income either on ZONE
G00d-1or on Good-2 or on both Good-l and
Good-2.

115
 (non-P Certainlr
aonsfeas
getng combinai
Non-attainable & fall as
equa Good-1
non-attainable knoWn are
line
Line Good-2. Good-1 for line? a budget:that
are f shows ! that
sacrificed attainable of unit is region.
combinations
PriceGood-1 of between budget
prices
regioncombinations
Consumner's
Ziper
units line
combination. non-feasible
calledof be the Non-feasible it. ob.
or non-attainable
combinations
inside
This
2 & separates thethebudget ine
Good-2
units of to
ratio Attainable from Good-1 when:
are and ox the buyit.
Price60 30 beyond ab outsice inside buy
10) 30 that. Good-2
price combinations)thenon-feasible
ine lineof to called
= P P, that (income) combinations
b thecombinations
priceafBord to
Fig. thatSo Good-1: shows
beyond
30
attainable
along budget or
afford
is
market.
shows of line go point. Feasible 20 combinations:unit; 11) region
6(in units and consumer
or
10 shows only Fig.
budget non-attainable
per cannot
ab ab the of line Combinations
a
is
point
a this
or 60
a Good-1=2
canin
diagram This
line
Price
of
unit '2' Line line
combinations.
feasible combination 50
illustrates Good-2 40 30 20 10-4 attainable (ab
price consumerconsumer
in 1 that his any N
or
line line.
Good-2 Good-1.
is Because Thus,Thus,
shows Budget Budget a Thus,
called Can
given or
Non-feasible
Feasible
The budget
region.budget
Why 11 [Note:
Microeconornics.
introductory Fig.
FIGURE 11 A A
116
 Consumer's Equilibrium--Indifference Curve Anaysis

HOTS
0.How is budget line different from budget set?
Ans,
Basis of Difference Budget Set Budget Line
1. Meaning Budget set is defined in terms of this Budget line is defined in terms of this
equation: P,X, + P,X,s Y. equation: P,X, + P,X, =Y.
2. Combinations Budget set includes all combinations of Budget line includes only such
included goods Xand Y(given their prices) on combinatíons of goods Xand Y(given
which the actual expenditure is equal their prices) on which the actual
to or less than the given income of the expenditure by the consumer is exactly
Consumer. equal to his given income. Specifically,
it does not include such combinations
which are attainable but where:
consumer's expenditure < consumer's
income.

Slope of Budget Line/Price Line

AY Px
Slope of Budget Line/Price Line = AX Py
Note: Price of X= units of Y to be sacrificed to obtain one unit of X. Likewise,
Price ofY = units of X to be sacrificed to obtain a unit of Y.l
Slope of budget line/price line is shown in Fig. 12. FIGURE
Slope of Budget Line/Price Line BRAIN
TEASER

Read the statement

given below and answer
50+ 12 the question that follows:
Good-Y
'Slope of Budget Line/
40 Price Line shows the rate

30
AX-5
A
at which market price
allows the consumer to
AY=10 SUbstitute Good-X for
20 Good-Y."
Slope of a budget line is
10 expressed as

Ans. P
Px AYAX
X
10 15 20 30
Good-X
AY
Slope of price line =AX
It is constant throughout the price line, simply
because this is a straight line.
Price line is drawn as a straight line, because P, and P,
are taken as given in the market.

The figure shows that AY = 10 when AX = 5.

AY 10
So that the slope of price line =
AX
117
 Good
(without
Budgel
Prices both
everya lor line! market,
constant,
consumers
of
details). Shift
Backward otincome but ratio. 13Fig.
increase.
constant.
as
assumed
decreases.
sacrileed sraght line, more decreases. same and
constant,
Gud obtuining straight
the givenbuy2
for backward
when
line
i Downward? Table change: Consumer Py the 3 Table.
gh
be in can Y slope) and is Y in
of the a
a given Py, shifts whenrise
il to price(we
know,as Because,
consunmer
to Budget
Line Px. its Y, shifts
Px
through
thus,foY
Py
is (Refer by: these Shifts
in
drawnas
Imere Good AY AN Good-Y slope
of taken Slopedownward, indicated of illustrated
Y, lineis theY deseription slope)
shifts Y in
linewhen
obtanCiood of the lineare Line Y, Good Set and line. fall
sacittceI I Line as BudgetPy
of Good-X, straight are ine,budget
lineits consumer
assumed
much that priceY Good
and
of Budget Budget
changing
Budget
parallel)
and
are
to ofunits
Forward
Shift
noteda Futher, Budget set
slopes less decrease.
Px
X budget brief both situations
hoW gOodsbuys budget of theare
increases. (and
that the of is and line in a in
(without
of Prices
}NNHÌCe unit be ine N does of he Changes in Rotation
is income Py forward
butthe
samne
ratio,
showN of showing tmust slope), in ()
Shitts FollowingShifts increasesand constant, Both
hore prie Good Budgetpriceswhen Changes fAYforward constant these
ms when Px shitts
Why (i) () Y is
 Consumer's Equitibriurm-ndifference Curve Arabysis
Table 3. Shift in Budget Line
Existing Budget Set when New Budget Set when New Budget Set when
Income()60, Income (Y)=120, Income (Y)30,
P2, P, =tl P-2, P,=1
Good-t Good-2 Good-1 Good-2 Good-f Good-2
60 120 30

40 20 80 20
10
20 20 40 40 10 10

30 60 15

Consequent upon increase and decrease in consumers' income, his budget

line shifts to the right and left as shown in Fig. 13.
FIGURE
Shift in Budget Line
120fc
Budget line shifts forward when:
Good-2 Consumers' income increases from
904 13
60 to 120 (P,,P2 remaining constant)

60 Existing budget line when:

consumers' income = 60,
P, =2, P, = 1
30e Budget line shifts backward when:
Consumer's income decreases from
d 60 to 30(P1, P, remaining constant)
+X
15 30 45 60
Good-1
Budget line shifts to the riqht frorn ab to cd, and the shift is parallel
increases.
when: (i) P, &Py are constant, and (ii) income of the consumer
Budget line shifts to the left from ab to ef, and the shift is parallel when:
decreases.
(() P, &P, are constant, and (ii) income of the consumer

(ii) Rotation of Budget Line

(a) Rightward Rotation: Budget line rotates to the right when: Px or aFIGURE
FIGURE
Py falls,as in Fig.14 and Fig. 15.
Px.Py, Y

Good-Y Good-Y 15
14
a

When Py falls When Py falls

ababg ab- agb

Good-X Good-X
19
 line. budget the onlie wil
line. budget Combinations: 0Y4Y10X++5X(a()b)
the onlie wil 40 equalspending
to combinationExample:
400 50Y 40X+ with
S00.8 P Line Budget Any
40
Px ope
Slof (i)
400 =50Y 40+
X
P,Qy
Y
40? to750 from Py budget experiencedPQx+ Equation:
the in Line Budget (i)
Good-Y? spent
on
ifallsncomeis ifline his al consumer be
wilchange
line. budget buyif of
type What (v) Ans.
tout
he side liewhich caan Good-
line.budget the onwhilie ch acombi
nY
d natiXonsof Y uniofts many How
data. above the for linebudget aY
nd Xof combi nations such two State (ii(iv))
questions: following sl
of ope and line budget equation such two State (i )
anu ces
Priof
A thAnswer
e respectively. of the State
Y.
and goodsX purchase
of unit (i)
on
spendsit per and?
50 40
isi?ncome Consumers
UNDERSTANDINHe
G 400. YOUR TEST Q.
ng left the rotates
to X-axis. the
linebudget and rises Py17, Fig. In
ng left the rotates
to line budget Y-axis. the
and rises Py16, Fig. In
Good-X
b Good-X
+X
ab-ab abab-
ises Py
When rises Py
When
Good-Y
Good-Y
aFGUR8
FIGUREPx‘.PY
whet.
t g P left the rottoates 17. Fig. and 16
Fig. inrises,
as
line Budget Rotation: Leftward (b)
rting tight tes
the rötato X"axis. the
heht linebudget and fal s Py15, Fig. In
tes
the rotato line budget Y-axis. the
and falls 14, Fig.
Py In
Microeconomis Introductoy
 ConsurnersEquitibriyrTeditference Curve Anaysis

Derivation:
40 (5) + 50 (4) -40O
40 (10) + 50 (0) =400
40X + 50Y = 400
Any combination with spending greater than 400 will lie outside the budget line.
Example:
Combinations:
(a) 6X + 5Y
(b) 6X +6Y
will lie outside the budget line.
Derivation:
40 (6) + 50 (5) =490> 400
40 (6) + 50 (6) =540 > 400
(iv) 40X +50Y = 400;given consumption of Good-X =0
40 (0) + 50Y = 400
400
Y = = 8 units.
50
(v) IfP, falls from ?50to 40, budget line rotates to the right starting from X-axis.

6. OPTIMUM CHOICE OF THE CONSUMER:

CONSUMER'S EQUILIBRIUM
Consumer's equilibrium refers to optimum choice of the consumer. It
is reached when he maximises his satisfaction. In terms of indifference
curve analysis, the consumer reaches his optimum choice when two
conditions are satisfied:
Px Note: The terms budget line/price line
(i) MRSXy = Py are used interchangeably. These
are synonyms of each other.

Slope of 1C Slope of Price Line/Budget Line

So that, in astate of equilibrium, IC and price line are tangent to
each other.
(ii) IC is convex to the origin at the point of equilibrium.
Fig. 18 offers diagrammatic illustration of consumer's equilibrium. It
1S drawn on the assumption that the consumer is spending his given
income ( 60) across Good-X and Good-Y only, &Py and Py are given
(Py=2, and Py =1).
In the diagram, Eisthe point of equilibrium. Here, both the conditions
of equilibrium are
satisfied:
6) MRSxy = Px , and
Py
() 1C is convex to the origin at the point of equilibrium.
121
 introcuctory MicroeconOmics

In a state of equilibrium, the

30units of Good-Y. He is consumer is
FIGURE
buying 15 units ofof Good%
maximising his satisfaction
Consumer's Equilibrium:
Diagrammatlc
18
60

Good-Y
50
Presentation
E:Point of equilibrlum
Here,
40

30
MRSXY:
Or, Slope of
IC=
To the left of Slope of Price line
204
point E, MRSXY >
10 To the right of Py
point E, MRSY <I
IC
10 15 20 25 30 >X
Good-X
"E:Point of equilibrium. It is here only that MRSXy = or
Slope of IC= Slope of price line,or IC Py
are tangent to each other. and price line
Given his income 60), he is
(at the price of 2 per buying 15 units of Good-X
price ofR1 per unit). unit) and 30 units of Good-Y (at the

Observations
In Fig. 18, PQ is the
budget line. It sets a budget
Consumner. The consumer cannot go beyond constraint for ti:
this line given his incont
(R 60)and price of
The budget line also Good-X2per unit) and of Good-Y R 1per unt
an additional unit of reflects how much of Good-Y is tto be sacrificedfor
IC is the
Good-X, given the prices of Xand Y.
Good-X andindifference curyve. It shows consumer s preferences for
Good-Y. It reflects how many units the Consumer
willing to sacrifice of Good-Y for an additional unit of
The equilibrium is
Good-A
struck at point E where Px TherateA
which the consumer is MRSyY = Py
his tastes
and preferences) coincideswilling to substitute
with the X for
rate at which (givenallows
theYmarket the
consumer to substitute Xfor Y(given his income and prices ofgoos
Xand Y).
At point E, the consumer is willing to sacrifice 2 units of y for
1unit of X(= MRS). This is exactly equal to the rate at whichthe markd
allows him to substitute X for Y

122
 eenätu Aay departure fom this wod ony kwer the evefbis

Rationale Behind Conditions of Equilibrium

le nestan the RtiONle dehindthe coatias of qalidrum ia

Conditien i: MRSY

Slepe oflC*Slope of Price Line

Or, lCsnd Priceline are tan gent to each other
Lestake an illustration:
willgto ai
le MRSy2, ànicaing that the osmer is

Ào
=2:,indicating that the pràe ofGXis2 toms the
pla ofnits
Ga).Or, that lunit of God- can e purchasad in

Thus, when MRS=2:land 2:l(and harequal) the OsT

ause the rate at which the onsumers
tein a state otuibrium,
to the rate at whch the mart
Wling tosubstitute Xfor Yis exactly equal
allows X to be substituted for Y.

Condition 2: ICis Convex to the Origin at the

point ofEquilibrium
be convex tothe origin, 1his
At the point of equilibriu, IC must ommtY must he
SDeaue, marginal utility derivd iom evey nsue
hold god, the
ecnsunme mOre of i. lf thìs law does not
Can equlibrium ever
Can never each a point of stable equilhbrium. ottes mor and oe
eached when every additional unit ofa ommoity
atistaction? Certainly not.
 situation upward
lc lefa are Chocolates afford.
budget
the1 move
the
of fal. a to
should
Y
and can't
MRSyy>
the
to to in
Convexity upward
"F
aftor.
tends Y X equilibrium?
goods
and he
is, moves A can't
when1C,the
to
MRSxy
X i B Rohan's
That of Toffees Rohan
the) goods Px P prices
situation
in IC,
his X. consumer chocolates.
right Y,
along = in hispoint
between the toffees.
his which which
of MRSyy
of of place theis
consumer shows with exhaust
along
tightplaceconsumption the the satisfaction.
no but but
a in as when
& MRSy
=2 spending
in Y
Y
and P7 Py and
Identify
alongside
it at'D'no D'
IC and
X of that MRSyy
= match not
chocolates point
his of moreensurespoint X when his would as toffees
goods
alongdownward
more this curve. maximises satisfaction
to
his consuming ata
IC stop MRSyy figure
allocate
andbelow:
onlypreferred
F
(vi)
downward
consuming
adjust two onlywhich
move the TEST
YOUR
UNDERSTANDING
Py-4,
diagram
indifference buys B,
move should only The given
Rohan buys same
conuner of be bundle (v)
consumer startConvexity will to he goods. he bundle
(Onori, moves
should start He consumes and how toffees,thestatement
whichwhich
thewhich E,
(iv)
should rise. What 8 these yieldingconsumption
consumption
should choosing A,
andandin
SubstitutingPx at
Theconsumer
the consuner IC, to Ans.
At
equilbrium, mentionedat at
point for point (ii)
HOTS will
a
will p
consumer
Ans.
consuner
the tends
MRSyy along MRSy
respectively.
Aconsumer MRSyy
2. chocolates
is
Rohan budget TheTheA
point
line appropriate
budget point
The (i)
C,
Mew the Mow Theleft (6) (ii)(ii)
A A D,
as as (iv)(v) (vi)(i)
0,1. Ans 0.2. .1. Q.2. Ans.
Analysis consumer of one by to represents of
the awhich of consumer his
level determinedis price reaches 125
for which
Curve price goods market
same sacrifice the
the IC therefore, consumer
EquilibriumIndifference mnarket allows
offer the is An oftwothe
to This diagram.
change. which offering willing given and price
and combinations The
AY AX goods,
goods income goods,
two market consumer.
not goods consumer
is a
change. as in
these
does two expressedtogether which
Equilibrium two of
not goods of level
preferences. different
on Px Py the
Consumer's combinations of income
preferences. of aGood-Y
which placed set
a at as of
does combinations is higher choice
rate expressed
isIt
two and
andother. curves
satisfaction. of showing
combinations
attainable a
line the
entire optimum
Consumer'sthe MRS,and to Curve
Indifference shows
given corresponds other.
each for monotonicdifferent
preference as tastesindifference Y-axis. his
is different known each Linefor
Good-Y.
of
consumer of of spends
he to
substitutes amounthis level consumer.
of of on IC or
intersect isLine) Line/Pricerefers origin.
Analysis by rational.
set origin.
of dr0ven satisfaction.
shows is depending
of another higher X-axis
a consumer. It Equilibrium
the scale to the Good-X. set satisfaction.
of downward.
Features/Properties
when
or touch the Price substitute
to
Good-X
of are consumer's refers a the
shows when:and the
optimumn
choice
Curve shows is known.
goods is is
IC incomne consumer
consumer Map above to cross to
refers
Set of can Budget
attain to
consumer, Px Py convex
Summary
of Set of the
IC of
Slope
of
convex
slopes IC not
not
income
(or
(i)
MRSy=
Assumptions
two levelIndifference
Indiference to unit andof
Indifference
level Higher Line are Consumer's
Money satisfaction do ICdoes Osumerof
goodsSlope
right ICis goods
and is
The The The The same
higher 1C
more ICs Budget Budget IC
the
(i) (ii) (i)(iv) (v)
(i) (ii) (iii) (iv) (v)
the the (ii)
the
e