Consumer equilibrium under indifference curve analysis
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Transcript of Consumer equilibrium under indifference curve analysis
SEMINAR Presentation
Muhammed Haneef T.PAskar
Muhammed Younis Salim
SAFI Institute of Advanced Study, Vazhayoor
BA Economics Programme
Consumer Equilibrium under Indifference Curve Analysis
I. Introduction to Indifference curve analysis
II. Assumptions to equilibrium of the consumer
III. Indifference Map and Budget Line of consumer
IV. Consumer’s Equilibrium or Maximization of Satisfaction
V. First and Second order condition for consumer equilibrium.
VI. Income Effect: Income consumption Curve
a) ICC of Normal Good
b) ICC of Luxury Goods
c) ICC of Inferior good
VII. Conclusion
Consumer Equilibrium under Indifference Curve Analysis
Consumer Equilibrium under Indifference Curve Analysis
1. Introduction to Indifference curve analysis
Consumer Equilibrium under Indifference Curve Analysis
1. Introduction to Indifference curve analysis
• Ordinal means- Can be compare with each other- 1St , 2nd , 3rd etc.
• Ordinal Utility analysis - Utility can compare but can not be measure.
• Popularized by J.R. Hicks and R.G.D. Allen
• Used the tool named Indifference Curve
• Known as Indifference curve approach of utility analysis
Consumer Equilibrium under Indifference Curve Analysis
1. Introduction to Indifference curve analysis
a) Consumer is rational or Rationality
b) Utility is ordinal
c) Consistence in choice
If A > B, then never become B > A
4. Consumer’s Preference is Transitive:
If A > B and B > C, then A > C
5. Diminishing Marginal Substitution of goods:
6. Dependent Utility
7. A Large bundle of goods preferred to small bundle
Assumptions Indifference Curve Analysis
II. Assumptions to explain equilibrium of the consumer
Consumer Equilibrium under Indifference Curve Analysis
II. Assumptions to equilibrium of the consumer
Consumer Equilibrium under Indifference Curve Analysis
To Explain the consumers equilibrium the following assumption is there
1. The consumer has Indifference Map of good X and Good Y
2. The consumer have a fixed money income which are spend on X and Y
3. The Prices of good X –Px and good Y – Py are given
4. Good are homogenous
III. Indifference Map and Budget Line of consumer
Consumer Equilibrium under Indifference Curve Analysis
A graph showing a whole set of indifference curves is called an indifference map. An
indifference map, in other words, is comprised of a set of indifference curves. Each
successive curve further from the original curve indicates a higher level of total
satisfaction.
III. Indifference Map and Budget Line of consumer
Consumer Equilibrium under Indifference Curve Analysis
III. Indifference Map and Budget Line of consumer
Consumer Equilibrium under Indifference Curve Analysis
Combination Biscuit Coffee
A 10 0
B 8 1
C 6 2
D 4 3
E 2 4
F 0 5
A budget line or price line represents the various combinations of two goods which can
be purchased with a given money income and assumed prices of goods".
Y
Income (Y)= 60
Price of Biscuit (Px) = 6
Price of Coffee(Py) = 12
Consumer Equilibrium under Indifference Curve Analysis
IV. Consumer’s Equilibrium or Maximization of Satisfaction
Consumer Equilibrium under Indifference Curve Analysis
IV. Consumer’s Equilibrium or Maximization of Satisfaction
"The term consumer’s equilibrium refers to the amount of goods and services which
the consumer may buy in the market given his income and given prices of goods in
the market, that give maximum satisfaction to consumer".
The aim of the consumer is to get maximum satisfaction from his money income.
Given the price line or budget line and the indifference map:
Consumer Equilibrium under Indifference Curve Analysis
IV. Consumer’s Equilibrium or Maximization of Satisfaction
"The term consumer’s equilibrium refers to the amount of goods and services which the
consumer may buy in the market given his income and given prices of goods in the market".
The aim of the consumer is to get maximum satisfaction from his money income. Given
the price line or budget line and the indifference map:
Consumer Equilibrium under Indifference Curve Analysis
IV. Consumer’s Equilibrium or Maximization of Satisfaction
"A consumer is said to be in equilibrium at a point where the price line is touching the highest attainable indifference curve from below"
Consumer Equilibrium under Indifference Curve Analysis
IV. Consumer’s Equilibrium or Maximization of Satisfaction
"A consumer is said to be in equilibrium at a point where the price line is touching the highest attainable indifference curve from below"
Consumer Equilibrium under Indifference Curve Analysis
IV. First order and Second order condition for consumer Equilibrium
Consumer Equilibrium under Indifference Curve Analysis
IV. First order and Second order condition for consumer Equilibrium
First order condition : A given price line should be
tangent to an indifference curve or marginal rate of
satisfaction of good X for good Y (MRSxy) must be equal
to the price ratio of the two goods. i.e.
MRSxy = Px / Py
Slop of IC = Slop of Budget Line
Second order condition : The second order condition is
that indifference curve must be convex to the origin at
the point of tangency.
Thus the consumer’s equilibrium under the indifference curve theory must meet the following two conditions:
Consumer Equilibrium under Indifference Curve Analysis
IV. First order and Second order condition for consumer Equilibrium
First order condition : Necessary Condition
A given price line should be tangent to an indifference curve or marginal rate of satisfaction
of good X for good Y (MRSxy) must be equal to the price ratio of the two goods. i.e.
MRSxy = Px / Py
(1) Budget Line Should be Tangent to the Indifference Curve:
Slope of the Price Line to be Equal to the Slope of Indifference Curve:
Price of X / Price of Y = MRS of X for Y
Slop of Budget Line = Slop of IC
Consumer Equilibrium under Indifference Curve Analysis
IV. First order and Second order condition for consumer Equilibrium
Second order condition : Sufficient Condition
The second order condition is that indifference curve must be convex to the origin at the
point of tangency.Indifference Curve Should be Convex to the Origin at the point of Tangency
V. Income Effect: Income consumption Curve
a) ICC of Normal Good
b) ICC of Inferior good
c) Luxury good
Consumer Equilibrium under Indifference Curve Analysis
V. Income Effect: Income consumption Curve
Consumer Equilibrium under Indifference Curve Analysis
The Income effect in economics can be defined as the change in consumption
resulting from a change in real income.
If the prices of goods, tastes and preferences of the consumer remains constant and
there a change in his income, it will directly affect consumer’s demand. This effect on the
purchase due to change in income is called the income effect.
V. Income Effect: Income consumption Curve
Consumer Equilibrium under Indifference Curve Analysis
The Income Consumption Curve show how income effect on the quantity consumed
of the good
V. Income Effect: Income consumption Curve
Consumer Equilibrium under Indifference Curve Analysis
If the prices of goods, tastes and preferences of the consumer remains constant and there a
change in his income, it will directly affect consumer’s demand. This effect on the purchase due
to change in income is called the income effect.
V. Income Effect: Income consumption Curve
a) ICC of Normal Good
Consumer Equilibrium under Indifference Curve Analysis
V. Income Effect: Income consumption Curve
a) ICC of Inferior good
Consumer Equilibrium under Indifference Curve Analysis
The good which is purchased less with the increase in income is called inferior good.
Wheat is inferior
Rice is inferior
V. Income Effect: Income consumption Curve
Consumer Equilibrium under Indifference Curve Analysis
Good X
Good Y
ICC - good X is Inferior and good Y is Normal
ICC - good Y is inferior and good X is Normal
V. Income Effect: Income consumption Curve
Consumer Equilibrium under Indifference Curve Analysis
Good X
Good Y
ICC - good X is necessity and good Y is Luxury
ICC - good Y is necessity and good X is Luxury
I. Introduction to Indifference curve analysis
II. Assumptions to equilibrium of the consumer
III. Indifference Map and Budget Line of consumer
IV. Consumer’s Equilibrium or Maximization of Satisfaction
V. First and Second order condition for consumer equilibrium.
VI. Income Effect: Income consumption Curve
a) ICC of Normal Good
b) ICC of Luxury Goods
c) ICC of Inferior good
VII. Conclusion
Consumer Equilibrium under Indifference Curve Analysis
Conclusion
Consumer Equilibrium under Indifference Curve Analysis