Consumer equilibrium under indifference curve analysis

SEMINAR Presentation

Muhammed Haneef T.PAskar

Muhammed Younis Salim

SAFI Institute of Advanced Study, Vazhayoor

BA Economics Programme

Consumer Equilibrium under Indifference Curve Analysis

I. Introduction to Indifference curve analysis

II. Assumptions to equilibrium of the consumer

III. Indifference Map and Budget Line of consumer

IV. Consumer’s Equilibrium or Maximization of Satisfaction

V. First and Second order condition for consumer equilibrium.

VI. Income Effect: Income consumption Curve

a) ICC of Normal Good

b) ICC of Luxury Goods

c) ICC of Inferior good

VII. Conclusion



1. Introduction to Indifference curve analysis



• Ordinal means- Can be compare with each other- 1St , 2nd , 3rd etc.

• Ordinal Utility analysis - Utility can compare but can not be measure.

• Popularized by J.R. Hicks and R.G.D. Allen

• Used the tool named Indifference Curve

• Known as Indifference curve approach of utility analysis



a) Consumer is rational or Rationality

b) Utility is ordinal

c) Consistence in choice

If A > B, then never become B > A

4. Consumer’s Preference is Transitive:

If A > B and B > C, then A > C

5. Diminishing Marginal Substitution of goods:

6. Dependent Utility

7. A Large bundle of goods preferred to small bundle

Assumptions Indifference Curve Analysis

II. Assumptions to explain equilibrium of the consumer




To Explain the consumers equilibrium the following assumption is there

1. The consumer has Indifference Map of good X and Good Y

2. The consumer have a fixed money income which are spend on X and Y

3. The Prices of good X –Px and good Y – Py are given

4. Good are homogenous



A graph showing a whole set of indifference curves is called an indifference map. An

indifference map, in other words, is comprised of a set of indifference curves. Each

successive curve further from the original curve indicates a higher level of total

satisfaction.





Combination Biscuit Coffee

A 10 0

B 8 1

C 6 2

D 4 3

E 2 4

F 0 5

A budget line or price line represents the various combinations of two goods which can

be purchased with a given money income and assumed prices of goods".

Y

Income (Y)= 60

Price of Biscuit (Px) = 6

Price of Coffee(Py) = 12





"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, that give maximum satisfaction to consumer".

The aim of the consumer is to get maximum satisfaction from his money income.

Given the price line or budget line and the indifference map:



"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. Given

the price line or budget line and the indifference map:



"A consumer is said to be in equilibrium at a point where the price line is touching the highest attainable indifference curve from below"



"A consumer is said to be in equilibrium at a point where the price line is touching the highest attainable indifference curve from below"


IV. First order and Second order condition for consumer Equilibrium



First order condition : A given price line should be

tangent to an indifference curve or marginal rate of

satisfaction of good X for good Y (MRSxy) must be equal

to the price ratio of the two goods. i.e.

MRSxy = Px / Py

Slop of IC = Slop of Budget Line

Second order condition : The second order condition is

that indifference curve must be convex to the origin at

the point of tangency.

Thus the consumer’s equilibrium under the indifference curve theory must meet the following two conditions:



First order condition : Necessary Condition

A given price line should be tangent to an indifference curve or marginal rate of satisfaction

of good X for good Y (MRSxy) must be equal to the price ratio of the two goods. i.e.

MRSxy = Px / Py

(1) Budget Line Should be Tangent to the Indifference Curve:

Slope of the Price Line to be Equal to the Slope of Indifference Curve:

Price of X / Price of Y = MRS of X for Y

Slop of Budget Line = Slop of IC



Second order condition : Sufficient Condition

The second order condition is that indifference curve must be convex to the origin at the

point of tangency.Indifference Curve Should be Convex to the Origin at the point of Tangency

V. Income Effect: Income consumption Curve


b) ICC of Inferior good

c) Luxury good




The Income effect in economics can be defined as the change in consumption

resulting from a change in real income.

If the prices of goods, tastes and preferences of the consumer remains constant and

there a change in his income, it will directly affect consumer’s demand. This effect on the

purchase due to change in income is called the income effect.



The Income Consumption Curve show how income effect on the quantity consumed

of the good



If the prices of goods, tastes and preferences of the consumer remains constant and there a

change in his income, it will directly affect consumer’s demand. This effect on the purchase due

to change in income is called the income effect.





a) ICC of Inferior good


The good which is purchased less with the increase in income is called inferior good.

Wheat is inferior

Rice is inferior



Good X

Good Y

ICC - good X is Inferior and good Y is Normal

ICC - good Y is inferior and good X is Normal



Good X

Good Y

ICC - good X is necessity and good Y is Luxury

ICC - good Y is necessity and good X is Luxury

I. Introduction to Indifference curve analysis




V. First and Second order condition for consumer equilibrium.

VI. Income Effect: Income consumption Curve


b) ICC of Luxury Goods

c) ICC of Inferior good

VII. Conclusion


Conclusion


Education

Consumer equilibrium under indifference curve analysis