Explain the conditions of consumers equilibrium using indifference curve analysis CBSE Class 12 Economics 2016

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Explain the conditions of consumer’s equilibrium using indifference curve analysis. - CBSE Class 12 Economics 2016

Appeared in CBSE economics class 12, 2016, Delhi, Set 1 paper

Asked by:Aparna-Dasgupta

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A consumer will strike his equilibrium at the point where the budget line is tangent to an indifference curve.
Slope of IC = Slope of price line

Equality of marginal rate of substitution and ratio of prices: When the budget lines is tangent to an indifference curve at a point, the absolute value of the slope of the indifference curve and of the budget line are equal at that point, i.e. MRS is equal to the price ratio. The slope of the budget line is the rate at which the consumer can substitute  one good for the other in the market. At the optimum, the two rates should be the same. Thus, a point at which the MRS is greater, the price ratio cannot be optimum, and when the MRS is less than the price, the ratio cannot be optimum.
The equilibrium can be represented as follows:

In the diagram, Point E shows the consumer’s equilibrium where the budget line is tangent
to the indifference curve. Consumers’ desire to purchase correspond to the consumer
originally purchase, i.e. x1*, x2* shows the optimum bundle.
Consumer does not reach equilibrium condition at the following points:

Answerd By:milan-ransingh

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