Page 67 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes Now assume that the price is stable for apple but the price is changed for orange. Also assume that the
income of consumer is stable by 4.00 as Fig. 4.20 shows the original budget line is AB. Budget line
would be AC if the price of orange falls and it will show that consumer now can buy more oranges than
his normal income. But if the price of orange changes then the budget line will go backward on AD and
it will show that consumer can buy less oranges from his stable income. In summarized way, the slope
of budget line has changed if the price of a product changes and all other situations remain same.

4.14 Consumer’s Equilibrium

Every consumer wants to buy maximum satisfaction with his fixed expenditure. A consumer can know
with the help of indifference curve that how can he get maximum satisfaction with spending his income
in various products. When consumer gets his maximum satisfaction with his limited income then it is
called Consumer’s Equilibrium. Thus consumer equilibrium describes that the consumer wants to buy
maximum satisfaction on expenditure on fixed products and services with his fixed income and not
want to change this at all.
In the word of Kautsuvyani, “The consumer is in equilibrium when he maximizes his satisfaction given
his income and the market prices.”

4.15 Two Basic Conditions of Consumer’s Equilibrium

The consumer’s equilibrium finds where the tangency is between budget line and convex indifference
curve.
As per Kautsuvyani, “The two terms for consumer’s equilibrium are”:
(i) Budget line or price line should be tangent to indifference curve means for X, the marginal
P
change ratio should average to its price of Y i.e. MRS = x .
xy
P
y
(ii) Indifference Curve must be Convex to the origin.
(a) Budget line or price line should be tangent to indifference Curve: In Fig. 4.21, AB is budget
or price line. IC , IC and IC are indifference curves. A consumer can buy any combination
2
1
3
Fig. 4.21

Y
Consumer’s
Equilibrium
8 A

6
C
D
4
IC 3
2 IC 2
IC
E 1
B
O X
1 2 3 4
Apples

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