Monday, 18 January 2016

Consumer Equilibrium, indifference curve and consumer behaviour

It is assumed that consumers are constantly engaged in efforts to maximise their total utility. They always try to satisfy their needs through different combinations and choices of goods to maximise utility. So, the solutions that they find after making so many experiments and  decisions in maximising their satisfaction is known as the consumer equilibrium. It is arrived at with a set of indifference curves depicting their preferences for goods.

An indifference curve is a curve formed on a graph by connecting the points of different combinations of two commodities that a consumer regards as of equal value and are giving him equal satisfaction. The consumer regards any combination on that curve as of equal value and so he is indifferent to each of those combinations.

With a given income and the present ranges of prices, the consumer has to choose among various alternative combinations of goods and services to get utmost satisfaction and enjoy most of those goods and services. The manner in which he responds and the solution that he finds at a particular level with a given combination is his equilibrium.

Consumer equilibrium definition
Consumer equilibrium is a state of balance achieved by the consumer of goods and products that refers to the quantum of goods and services he can purchase within his given level of income and at the prevailing current prices.

Consumer Equilibrium is the point of balance at which stage, the consumer is able to get maximum satisfaction from a reasonable combination of multiple goods at their given prices and within his income. At this point, he is able to achieve maximum utility level and any shifts from that point will only diminish his satisfaction level.

Assumptions underlying Consumer's Equilibrium
The following are some of the assumptions that are implicit in studying the consumer equilibrium.

  • Consumer's income is given and he has to act within that income.
  • The prices are set and stable for the time being under study.
  • It is assumed that there are two goods X and Y and he has to choose various combinations of those two goods.
  • The indifference curve is the maximum possible level of satisfaction within his income selected from the indifference map or set of indifference curves.

Now, let us take an example. Suppose your income is $100 and you have to purchase two goods within that income. Let us assume that price of product X is $10 and that of product Y is $20. Now if you want to purchase only one commodity, then you can purchase either 10 units of X or 5 units of Y. But, you can't have only one item. You want to buy both items to maximise your satisfaction levels. So, you will try different combinations and the results are depicted through the indifference curves in the below indifference map.

In the above figure, X axis depicts product X and Y axis depicts product Y. At the right hand side  tip of each curves IC stands for indifference curve. So, there are four indifference curves drawn by us named IC1, IC2, IC3 and IC4. You will be able to notice that points on IC1, 2 and 3 fall within your income range. But IC4 is completely out of your income range as it is away and out of the price line. Price line AB is tangent to the indifference curve IC3 touching it at point E. So, point E can be considered as the consumer equilibrium point at which he is able to maximise his satisfaction levels by purchasing Q1 units of product X and Q2 units of product Y. Any other points on lower levels touching the price line will be of lesser satisfaction. Further, he is not spending his full income at those points. Points at higher levels do not touch the price line AB and so they are not in his income range.

So, consumer equilibrium is that point of level, where the consumer is able to maximise his satisfaction by spending his full income on those products in a better way. In practical life, there are so many products that the buyer purchases and it is a more complicated problem. The decision making ability of consumer shows his smartness and prudence in attaining consumer equilibrium.

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