The indifference curve is so named because the consumer would be indifferent between choosing any one of these commodity bundles. Scanner utility analysis theory of consumer behaviour. Rational consumers according to this theory, a consumer always behaves in a rational manner, i. The slope of an indifference curve, the mrs, reflects the value placed on the additional unit of a good in terms of the other goods the consumer would be willing to give up. Consumers equilibrium with indifference curves analysis youtube.
Apr 19, 2009 microeconomics, managerial economics, indifference curve, budget line related links. The consumers equilibrium under the indifference curve theory must meet the following two conditions. With the help of indifference curve technique, the consumers equilibrium can be established. Application of indifference curve analysis changes in. This section presents an alternative approach to describing personal preferences, called indifference curve analysis, which avoids the need for using numbers to measure utility. The knowledge of the concept of budget line is essential for understanding the theory of consumer s equilibrium. An indifference curve defines the substitution between goods x and y that is acceptable in the mind of the consumer. In this article we will discuss about the concept of consumer s equilibrium, explained with the help of suitable diagrams and graphs. Thus, the sufficient condition of consumer equilibrium is that the mu curve must cut the price curve at its downward segment and not at its rising segment. In other words mrs tends to decline as we move along the ic left to right price line should be tangent to indifference curve out of c,d and e combinations, the consumer will be in equilibrium at combination e because at this point price line ab is tangent to the highest indifference curve ic 2. Modern economists explain consumer s equilibrium with the help of indifference curves referred to below in.
Indifference curves given the three basic assumptions disussed in the previous section, a consumers tastes and preferences can be indicated by means of an indifference curve. This short revision video on the theory of consumer choice looks at the equilibrium point between budget lines and a given set of indifference. What is consumer equilibrium through the hicksian approach. A consumer is said to be in equilibrium when he feels that he cannot change his condition either by earning more or by spending more or by changing the quantities of thing he. Indifference curve, marginal rate of substitution mrs or slope of indifference curve, properties of indifference curve. Jun 04, 2019 consumer equilibrium cbse notes for class 12 micro economics. The term consumers equilibrium refers to the amount of goods and services which the consumer may buy in the market given his income and given prices of goods in the market.
Chapter indifference curve chapter notes, micro economics. At the same time, the consumer possesses limited resources. A consumer is said to be highly satisfied when he allocates his expenditure in such a way that the last unit of money spent on. Consumer equilibrium refers to a situation, in which a consumer derives maximum satisfaction, with no intention to change it and subject to given prices and his given income. That is, any combinations of two products indicated by the curve will provide the consumer with equal levels of utility, and the consumer has no preference for one combination or bundle of goods over a different combination on the same curve. A higher indifference curve shows a higher level of satisfaction than a lower one. According to it when a consumer is presented with a number of various combinations of goods, he can order or rank. In a single commodity case a consumer is in equilibrium when marginal utility equals to the price.
If a consumer is at an optimum, consuming x and y, and the price of x decreases, then to get to a new equilibrium the consumer must. A consumer is said to be in equilibrium when he feels that he cannot change his condition either by earning more or by spending more or by changing the quantities of thing he buys. Four properties of indifference curves quickonomics. This approach also explains the consumer s equilibrium who is confronted with the multiple objectives and scarcity of money income. Let us now understand this with the help of a diagram. Consumers equilibrium with indifference curves analysis. The indifference curve analysis of consumers equilibrium is based on the following assumptions. The indifference curve approach managerial economics. Consumer equilibrium under indifference curve analysisiv.
Notes for cbse class 11th chapter 2 consumer s equilibrium. Cardinal approach to consumer equilibrium definition. Therefore consumer s equilibrium cannot be establish at point a. A combination of these two graphs is what gives us the optimum production level, i. Let us explain, with the help of indifference curve. Understanding consumers equilibrium by indifference curve. Law of diminishing marginal utility dmu, assumptions of law of dmu, relationship between totally utility and marginal utility. Consumer s budget it is the real purchasing power of consumer from which he can purchase the certain quantitative bundles of two goods at a given price. Jun 01, 2014 this is the main theme of the theory of consumer behavior. An income effect represents change in consumers optimal consumption combination on account of change in herhis income and thereby changes in herhis quantity purchased, prices of goods x p x and y p yremaining unchanged. Indifference curve adopted the concept of ordinal utility instead of cardinal utility.
This is the main theme of the theory of consumer behavior. If we assume that consumers wish to maximize their utility, while staying within their budget, we can describe the combination of goods and services they select to do that as their consumer equilibrium. A consumer is in equilibrium when he derives maximum satisfaction from the goods and is in no position to rearrange his purchases. Plan for financial fitness, shut up and listen hard business truths this will help you succeed. The consumer does prefer ic1 since the combinations represented on this indifference curve give him a lesser level of satisfaction and are inferior. Consumer equilibrium using indifference curve approach. Price line should be tangent to the indifference map. By now, you are clear about indifference curves and the budget line.
This chapter consists of a detailed account of concepts of utility, law of diminishing marginal utility, budget line, budget constraint, monotonic preferences, indifference curve, consumer equilibrium in cardinal single and several commodities. Therefore, a consumer in his attempt to maximise his satisfaction will try to reach the highest possible indifference curve. The term consumer s equilibrium refers to the amount of goods and services which the consumer may buy in the market given his income and given prices of goods in the market. In case of perfect complementary goods,the shape of the indifference curve have a right angled. While there are higher curves, ic 4 and ic 5, they are beyond his budget. Asked in economics, marketing advertising and sales illustrate and explain consumer equilibrium under cardinalist and. Explain the reaction of the consumer when marginal rate of. Here is an example to understand the indifference curve better. Exam 20, questions and answers consumer theory ecn. Mar 16, 2016 ordinal theory is also known as neoclassical theory of consumer equilibrium, hicksian theory of consumer behavior, indifference curve theory, optimal choice theory. Each combination offers him the same level of satisfaction. The consumer is said to be in equilibrium when he obtains the maximum possible satisfaction from his purchases. Join researchgate to find the people and research you need to help.
The equilibrium of the consumer cannot be established because only one point of the indifference curve is tangent to the price line ab. Indifference curve definition according to hicsallen indifference curve means all those combinations of goods that give equal satisfaction to the consumer so he will be indifferent between them and it will not matter to him which one he gets. Very important 6 marks a meaning of consumer equilibrium. Consider the simple case of a consumer who cares about consuming only two goods. The budget line is tangent to the highest possible indifference curve the slopes are equal the point of consumer equilibrium means the rate that consumer is able to trade is the rate he is willing to trade to remain at the same. Theory of consumer behaviour important questions for class 12 economics budget set, budget line and consumer equilibrium through indifference curve analysis or ordinal approach 1. In the above figure, the consumer attains equilibrium at point c where the slope of the budget line is equal to the slope of the indifference curve. Consumer equilibrium under indifference curve analysis.
Indifference curve analysis of consumers equilibrium. In figure 1 the curved line which passes through commodity bundle a represents an indifference. Browse more topics under theory of consumer behavior. We now describe in brief as to how indifference curves and budget lines can be used to analysis the effects on consumption due to a changes in the income of a consumer b changes in the price of a commodity. Since more is better, an indifference curve cannot have a positive slope. Apr 07, 2020 chapter indifference curve chapter notes, micro economics, class 12 edurev notes is made by best teachers of commerce. However, it was brought into extensive use by economists j. Q explain consumer equilibrium with the help of ic indifference curev analysis. Consumers equilibrium or maximization of satisfaction a consumer is said to be in equilibrium at a point where the price line is touching the highest attainable indifference curve from below 15. Learning the important concepts is very important for every student to get better marks in examinations. A consumer will therefore be in equilibrium when at the point of tangency of indifference curve and the budget line, the indifference curve is convex to the origin. Indifference curves and consumer equilibrium economics. Indifference curves and consumer equilibrium consumer equilibrium is reached at the point of tangency between the budget line and the highestattainable indifference curve. In this article we will discuss about the concept of consumers equilibrium, explained with the help of suitable diagrams and graphs.
The knowledge of the concept of budget line is essential for understanding the theory of consumers equilibrium. It is also noted that consumer is not tangent to the indifference curve at point a. The cardinal approach to consumer equilibrium posits that the consumer reaches his equilibrium when he derives the maximum satisfaction for given resources money and other conditions. Understanding consumers equilibrium by indifference curve analysis. Indifference curves have a negative slope, and in special cases zero slope. The term consumer s equilibrium refers to the amount of goods and services which the consumer may buy in the market given his income and given prices of goods in the market the aim of the consumer is to get maximum satisfaction from his money income. Thus the basis of indifference curve approach is the preference indifference hypothesis.
Consumer equilibrium cbse notes for class 12 micro. I have started a new you tube channel ecoseekho and will be uploading all the further videos there. The goal of a consumer is to get maximum satisfaction from the commodities he purchases. Using this equilibrium, the producer can determine different combinations to increase output. Cbse notes cbse notes micro economics ncert solutions micro economics. Understand that like price effect, a consumer s responses to income changes also differ depending upon the nature of the good, viz. This is the point of consumer equilibrium, where the consumer purchases om quantity of commodity x and on quantity of commodity y. Further, you could ascertain that a consumer is in equilibrium when he obtains maximum satisfaction from his expenditure on the commodities given the limited resources. The ordinal approach to consumer equilibrium asserts that the consumer is said to have attained equilibrium when he maximizes his total utility satisfaction for the given level of his income and the existing prices of goods and services. Indifference curve approach free notes for economics class 12.
The consumer will not like to purchase any other bundle on. A consumer equilibrium is a situation in which a person gets maximum satisfaction. The indifference curve indicates the various combinations of two goods which yield equal satisfaction to the consumer. The best app for cbse students now provides accounting for partnership firms fundamentals class 12 notes latest chapter wise notes for quick preparation of cbse board exams and school based annual examinations. If a consumer s indifference curve intersects the budget line, then it will always be possible for the consumer to make exchanges along the. Consumers tastes can be related to utility concepts or indifference curves. Measurement of consumers surplus with indifference curve. Slope of indifference curve slope of budget line or mrsxy pxpy the equilibrium purchase is ox of x and oy of y on the indifference curve l 2 2 the consumer cannot get satisfaction level higher than i 2 because his income does not permit him to move above the budget line ab. With this price in the market he will be in equilibrium at point p on a higher indifference curve ii and in this equilibrium position he will actually forego fp yi t amount of money for oh of commodity a. The above explanation of a consumer s equilibrium has been given with the help of the concept of utility. Consumers equilibrium notes microeconomics cbse class. Any combination lying on this curve gives the same level of consumer satisfaction. An indifference curve is a collection of all commodity bundles which provide the consumer with the same level of utility.
He always prefers higher ic to a lower ic to maximize his satisfaction. On an indifference map, higher indifference curve represents a higher level of satisfaction than any lower indifference. This is the best choice since q lies on his budget line and pts puts him on the highest possible indifference curve, ic 3. How does a consumer achieve equilibrium using an indifference. Explain utility maximization using the concepts of indifference curves and budget lines. Every consumer aims at a spending his income in a way that gives him. Q6 explain the conditions of consumer s equilibrium with the help of the indifference curve analysis. Furthermore, isocost lines help us determine combinations of two factors in which we can invest our outlays to produce output. This consumer knows the prices of goods 1 and 2 and has a fixed income or budget that can be. The point of maximum satisfaction is achieved by studying indifference map and budget line together. Consumer equilibrium under indifference curve analysis slideshare. Therefore consumers equilibrium cannot be establish at point a. Refer to the diagram above where xy is the relevant budget line and i 1, i 2, and i 3 are indifference curves.
Understand how the consumer maximizes satisfaction or reaches equilibrium. The consumer is in equilibrium at a point where the budget line. Therefore, he reaches the equilibrium at point q on curve ic 3. Consumer s equilibrium or maximization of satisfaction a consumer is said to be in equilibrium at a point where the price line is touching the highest attainable indifference curve from below 15. Apr 11, 2017 be smart be at complete entire economics syllabus.
Initially, the consumer is in equilibrium at point r where the budget line pq is tangent to the curve i 1 with the fall in the price of x, he moves to point t on the budget line p q 1 at the higher indifference curve i 1. In general, there is an indifference curve through any point in xy space. Jan 12, 2018 a consumer will therefore be in equilibrium when at the point of tangency of indifference curve and the budget line, the indifference curve is convex to the origin. In this chapter we first explain what indifference curves are, and indicate their important properties. In the above diagram a lies on a higher indifference curve than therefore the consumer will choose only y and buy oa of commodity y. Economists use the vocabulary of maximizing utility to describe consumer choice. It implies that the consumer is capable of simply comparing different levels of satisfaction. This section introduces the economic theory of how consumers make choices about what goods and services to buy with their limited income. You can analyze consumers equilibrium through the technique of indifference curve and budget line. Cbse class 12 ecomonics consumer equilibrium and demand. Explain consumers equilibrium with the help of indifference. The concepts should be clear which will help in faster learning. The consumer is betteroff when optimal consumption combination is located on a higher indifference curve and vice versa.
Download cbse class 12 ecomonics consumer equilibrium and demand concepts, economics chapter notes, cbse class 12 ecomonics consumer equilibrium and demand concepts. An alternative approach to understanding consumer choice learning objectives. It shows different combinations of two commodities between which a consumer is indifferent. A consumer is indifferent between various combination on an indifference curve. We then introduce the budget line and combine it with indifference curves to explain consumer equilibrium. An indifference map is a set of indifference curves. The income and substitution effects of a price change. Jan 12, 2018 as indifference curve theory is based on the concept of diminishing marginal rate of substitution, an indifference curve is convex to the origin. Understanding consumer s equilibrium by indifference curve analysis. The term consumers equilibrium refers to the amount of goods and services which the consumer may buy in the market given his income and given prices of. This document is highly rated by commerce students and has been viewed 33195 times.
So far in the text, we have described the level of utility that a person receives in numerical terms. Explain the consumer equilibrium with the help of indifference curve. By definition, an indifference curve shows all the various combinations of two goods that give an equal amount of satisfaction to a consumer. Definition an indifference curve is a curve which shows all the combinations of two products. Dec 16, 2011 consumer equilibrium under indifference curve analysisiv.
The aim of the consumer is to get maximum satisfaction from his money income. Also assume that indifference curves have their normal shape, that is, the mrs becomes flatter as you move along the x axis for any indifference curve. Indifference curve analysis and consumer analysis ordinal analysis. You can analyze consumer s equilibrium through the technique of indifference curve and budget line. Consumers equilibrium through indifference curve analysis. The concept of indifference curve analysis was first propounded by british economist francis ysidro edgeworth and was put into use by italian economist vilfredo pareto during the early 20 th century. As shown in the above figure, a consumer is in equilibrium at point e1 where budget line ab is tangent to the indifference curve ic1 which is convex to the origin.
If the combination of two goods occurs at a point of tangency between the budget line and an indifference curve. Notice that at this point, the budget line pl is tangential to the indifference curve. A consumer may find out his equilibrium condition with the help of indifference curve analysis. If marginal utility of rupee is not equal to one, then the consumer equilibrium with the help of schedule is. Jul 07, 2017 consumer equilibrium through indifference curve. Introduction to indifference curves and budget lines. Important questions for class 12 economics budget set. The properties of these indifference curves reflect the four consumer preference assumptions. With the constraint of budget line, the highest indifference curve, which a consumer can reach, is ic 2. How to derive consumers equilibrium through the technique. How to derive consumers equilibrium through the technique of. Consumer s equilibrium through indifference curve analysis. In economics, an indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is indifferent.
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