Q.4. What are the conditions of equilibrium of a consumer, when his indifference map, this income and prices of goods are given? Explain with the help of diagram. (2002-03)
Or. What are the conditions for consumer’s equilibrium? Explain and illustrate consumer’s equilibrium using indifference curve. (2003-04)
Ans. Let us explain, with the help of in difference curves how a consumers reaches an equilibrium position. The consumer is said to be in equilibrium when he obtains the maximum possible satisfaction from his purchases, given the prices in the market and the amount of money he has for marking purchases.
Equilibrium with Indifference Curve : -
Let us now consider how a consumer reaches an equilibrium position with the help of indifference curves. In order to explain how a consumer reaches equilibrium position, we shall make the following assumption.
(i) Our consumers has an indifference map showing his scale of preferences for various combinations of two goods apples and mangoes. This scale of preferences remains the same through out the analysis.
(ii) He has a given and constant amount of money to spens on the goods and if he does not spend it on one good, he must spend it on the other.
(iii) Price of the goods in the market are given and constant.
(iv) Each of the goods is homogeneous and divisible and
(v) The consumer acts rationally, that is, he tries to maximize his satisfaction. Suppose our consumer has an indifference map shown in the figure below –
Further suppose that the price line facing the consumer is AM, given a certain amount of all money he has to spend on apples and mangoes and the price of apples and mangoes in the market, since his income and the relative price of the two goods to be purchased are shown by the price income line AM, his equilibrium must this line is called the price opportunity line. The consumer will maximize his satisfaction and to be in equilibrium at a point where the price line to makes an indifference curve. Such a point in our diagram is P which lies on indifference curve to which he can go, given the money he has and the prices of the goods in the market.
Condition of Equilibrium: -
There are two conditions must be satisfied for a consumer to attain an equilibrium.
(i) The price line should be target to an indifference curve or MRS of one commodity for another should be equal to their relative price.
(ii) At the point of equilibrium an indifference curve must be convex to the origin.
Q.5 Bring out the properties of an indifference curve. (2003-04)
Or. What is indifference curve and what are its characteristics?
(2004-05)
Or. What is indifference curve? Explain also the redeeming characteristics of an indifference curve. (2005-06)
Or. What is indifference curve and what are its basic characteristics? (2007-08)
Ans. An indifference curve is a curve which represents different combinations of goods which give same satisfaction to the consumer. Since all the combinations on an indifference curve give equal satisfaction to the consumer. The consumer prefers them equally and does not mind which combination he gets. Indifference curves posses the following properties.
(i) Indifference Curves slope Downwards From Left to right: -
An indifference curve has a negative slope, which implies that it slopes downward from left to right. The reason underlying the property is that if the consumer has to stay at the same level of satisfaction, the quantity of one commodity must, decrease when the quantity of the other commodity increases. In the figure clearly explains this point. When the quality of apple increases from 12 to 6. When further the quantity of apple increases from 6 to 4 and so on. At each combination the level of satisfaction remains the same. Downward slope of an indifference curve is based on the assumption that both the goods give the consumer positive satisfaction i.e. he wants to consume more and more the commodity. This assumption is called monotonic city of preferences.
(ii) “Indifference Curve” Always Convex to Origin: -
As it has been shown in figure as more and more of one commodity i. E. apple is substituted for another banana, the consumer is willing to part with less and less of the commodity being substituted i.e. banana ( showon in figure convex to the origin IC).
This is called diminishing.
Marginal Rate of Substitution (MRS).
This happens mainly becomes want for a particular good is suitable and as a person has more and more up a good, his intensity of want for that good goes on diminishing. This diminishing marginal rate of substitution gives convex shape to the indifference curve as shown in figure.
(iii) Higher Indifference Curve represents higher level of satisfaction: -
An indifference curve lying above and to the right of another indifference curve represents a higher level of satisfaction. All combination of goods X and Y lying on the higher indifference curve IC2 as shown in figure will be preferable to consumer Vis-avis all combination of X and Y lying on IC1.
The consumer shall set greater satisfaction from a larger amount of good than from a smaller amount
[(OX2 + OY1 ) > ( OX1 + OY1)]
Commodity ‘x’ level of satisfaction by indifference curve.
(iv) Indifference Curves do not intersect Each Other: -
No two indifference will intersect each other although it is not necessary that they are parallel to each other. In case of intersections the relationship becomes logic absurd because it would show that higher and lower level are equal which is not possible.