SEMINAR Presentation: Consumer Equilibrium Under Indifference Curve Analysis

SEMINAR Presentation
Consumer Equilibrium under Indifference Curve Analysis

BA Economics Programme
Muhammed Haneef T.P Askar Muhammed Younis Salim
SAFI Institute of Advanced Study, Vazhayoor

I. Introduction to Indifference curve analysis
II. Assumptions to equilibrium of the consumer III. Indifference Map and Budget Line of consumer IV. Consumers 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
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
Assumptions 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. Consumers 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
II. Assumptions to explain equilibrium of the consumer

II. Assumptions to equilibrium of the consumer 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

III. Indifference Map and Budget Line of consumer
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 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".
Income (Y)= 60
Price of Biscuit (Px) = 6 Price of Coffee(Py) = 12 Combination Biscuit A B C D 10 8 6 4 Coffee 0 1 2 3
E
F
2
0
4
5
IV. Consumers Equilibrium or Maximization of Satisfaction

"The term consumers 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:

"The term consumers 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:

"A consumer is said to be in equilibrium at a point where the price line is touching the highest attainable indifference curve from below"

"A consumer is said to be in equilibrium at a point where the price line is touching the highest attainable indifference curve from below"
IV. First order and Second order condition for consumer Equilibrium

Thus the consumers equilibrium under the indifference curve theory must meet the following two conditions:
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.

First order condition : Necessary Condition (1) Budget Line Should be Tangent to the Indifference Curve: 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 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

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
V. Income Effect: Income consumption Curve 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 consumers demand. This effect on the purchase due to change in income is called the income effect.
V. Income Effect: Income consumption Curve
The Income Consumption Curve show how income effect on the quantity consumed of the good

V. Income Effect: Income consumption Curve If the prices of goods, tastes and preferences of the consumer remains constant and there a change in his income, it will directly affect consumers 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

V. Income Effect: Income consumption Curve a) ICC of Inferior good The good which is purchased less with the increase in income is called inferior good.
Rice is inferior Wheat is inferior

ICC - good X is Inferior and good Y is Normal
Good Y
ICC - good Y is inferior and good X is Normal
Good X

ICC - good X is necessity and good Y is Luxury
Good Y
ICC - good Y is necessity and good X is Luxury
Good X

I. Introduction to Indifference curve analysis
II. Assumptions to equilibrium of the consumer III. Indifference Map and Budget Line of consumer IV. Consumers 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
Conclusion

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SEMINAR Presentation

Consumer Equilibrium under Indifference Curve Analysis

SAFI Institute of Advanced Study, Vazhayoor

Consumer Equilibrium under Indifference Curve Analysis

VI. Income Effect: Income consumption Curve

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

4. Consumers Preference is Transitive: If A > B and B > C, then A > C

5. Diminishing Marginal Substitution of goods:

Consumer Equilibrium under Indifference Curve Analysis

II. Assumptions to explain equilibrium of the consumer

Consumer Equilibrium under Indifference Curve Analysis

Consumer Equilibrium under Indifference Curve Analysis

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

Consumer Equilibrium under Indifference Curve Analysis

Consumer Equilibrium under Indifference Curve Analysis

IV. Consumers Equilibrium or Maximization of Satisfaction

Consumer Equilibrium under Indifference Curve Analysis

Consumer Equilibrium under Indifference Curve Analysis

the price line or budget line and the indifference map:

Consumer Equilibrium under Indifference Curve Analysis

Consumer Equilibrium under Indifference Curve Analysis

Consumer Equilibrium under Indifference Curve Analysis

Consumer Equilibrium under Indifference Curve Analysis

First order condition : A given price line should be

Second order condition : The second order condition is

Consumer Equilibrium under Indifference Curve Analysis

Price of X / Price of Y = MRS of X for Y Slop of Budget Line = Slop of IC

Consumer Equilibrium under Indifference Curve Analysis

Second order condition : Sufficient Condition

Consumer Equilibrium under Indifference Curve Analysis

Consumer Equilibrium under Indifference Curve Analysis

resulting from a change in real income.

Consumer Equilibrium under Indifference Curve Analysis

V. Income Effect: Income consumption Curve

Consumer Equilibrium under Indifference Curve Analysis

to change in income is called the income effect.

Consumer Equilibrium under Indifference Curve Analysis

V. Income Effect: Income consumption Curve a) ICC of Normal Good

Consumer Equilibrium under Indifference Curve Analysis

Rice is inferior Wheat is inferior

Consumer Equilibrium under Indifference Curve Analysis

ICC - good X is Inferior and good Y is Normal

ICC - good Y is inferior and good X is Normal

Consumer Equilibrium under Indifference Curve Analysis

ICC - good X is necessity and good Y is Luxury

ICC - good Y is necessity and good X is Luxury

Consumer Equilibrium under Indifference Curve Analysis

VI. Income Effect: Income consumption Curve

Consumer Equilibrium under Indifference Curve Analysis

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