Consumer's Equilibrium through Indifference Curve Approach

A consumer’s equilibrium is a situation where a consumer obtains the maximum satisfaction possible from two goods with a given income and prices.

• Indifference Curve (IC): Shows combinations of two goods giving the same satisfaction level to the consumer.
• Budget Line (BL): Shows all combinations of goods the consumer can afford given income and prices.

1) Tangency Condition:
The consumer is in equilibrium when the budget line is tangent to an indifference curve (i.e., the highest IC attainable).

2) Slope Equality:
The marginal rate of Substitution (MRS) between the two goods equals the ratio of their prices:

\[MRS_{xy}=\frac{P_x}{P_y}\]

3) Convexity of IC:
The indifference curve at the equilibrium point is convex to the origin, ensuring diminishing MRS and stable equilibrium.

• The budget line KL limits what can be purchased.
• Points left or below KL are affordable but yield less satisfaction (e.g., A).
• Points right or above KL (such as D) are unaffordable.
• Equilibrium occurs at point T, where KL is tangent to IC2, providing maximum utility.

• Consumer preferences are stable (unchanged).
• Prices and income are fixed during analysis.
• Goods are divisible and homogeneous.
• A consumer acts rationally to maximise satisfaction.
• More is always preferred to less (non-satiation).
• Preferences are transitive (consistent ordering).

Shopping with limited money means choosing a combination of goods that makes you happiest but does not exceed your budget—just like point T in the curve.

• Consumer equilibrium means maximum satisfaction within budget.
• It happens where IC is tangent to the budget line.
• Points above budget line are unaffordable; points below are affordable but less satisfying.
• At equilibrium, \[MRS_{xy}=\frac{P_{x}}{P_{y}}\] and IC is convex.