Consumer equilibrium is the combination of various goods which gives maximum satisfaction to a consumer assumptions 1 ordinal utility 2 rational behaviour of a consumer 3 consistancy in choices
The aim of the consumer is to get maximum satisfaction from his given income with the constant prices of two commodities. The consumer,s equilibrium refers to a combination of two commodities which a consumer may buy in the market. Given the budget line and the indifference map, a consumer is said to be in equilibrium at a point where the budget line is tangent to the highest attainable indifference curve from below.
Individual Indifference Curves Recall: Utility is ordinal - all we know is that a higher level of utility is better, we don’t know how much better An indifference curve maps out the relationship between a number of consumption packages that maintain an individual’s utility (sense of satisfaction) at a constant level A higher indifference curve denotes a higher level of utility you(s3)>you(s2)>you(s1)
Consumer Indifference Curves
Consumer Indifference Curves Indifference curves slope downward, because more is better
Any point (like J) to the right and above another point (like G) must represent a higher level of utility. Therefore, J must be on a higher indifference curve than G.
Consumer Indifference Curves NOTE: We do not mean that more is better for each and every individual, only for enough individuals that we can be fairly certain that the behaviour behaviour that dominates in the economy will reflect “more is better”. NOTE: Diminishing marginal utility implies that indifference curves are convex to the origin. As a person tries to maintain the same level of utility by consuming more and more of one good and less of the other, the person requires larger quantities of the good being increased to compensate for the good being lost.
Impossible Consumer Indifference Curves
In comparison to the point (x1,y1), the points (x2,y1), (x1,y2) and (x2, y2) each represent a state where the person has at least as much of one good and more than another. Therefore, each of these points must be on higher indifference curves than (x1,y1).
S1, S2 and S3 cannot represent consumer indifference curves
Impossible Intersecting Curves for An Individual Consumer
Indifference curve S1 tells us that the consumer is indifferent between B and A. S2 shows that the consumer is indifferent between A and C
This implies that the consumer is indifferent between A, B and C
But point C has more of both goods that point B, therefore the consumer must prefer point C to point B
A Community Indifference Curve
Community indifference curves are NOT found by adding individual indifference curves
A community indifference curve represents bundles of X and Y that yield the same level of satisfaction for the country as a whole.
Intersecting Community Indifference Curves
Community indifference curves CAN intersect!
CI1 and CI2 represent different income distributions
Starting at A, the amount of X needed to compensate for a loss of Y is much greater under the income distribution represented by CI2 than required under CI1
Consumer Budget Constraint
The consumer budget constraint is defined by M=PyY+PxX.
What is its slope?
Consumer Equilibrium
Consumer equilibrium is found by MUx/Px = MUy/Py or
MUx/MUy=Px/Py What does it mean if MUx/Px >MUy/Py ?
Production Isoquants
Isoquants show the substitution between capital and labour that is required to maintain a particular level of output.
The slope of an isoquant is - MPPL/MPPK
Homothetic Isoquants with Constant Returns to Scale
An isoquant is homothetic if a change in the output constraint, but not the relative prices of capital and labour could be drawn as a ray from the origin
Consumer equilibrium refer to a situation in which a consumer buys that combination of various goods and serives which gives him maximum satisfaction at a given level of income and at given prices and at a given price and he is not willing to make any changes in the same
