Microeconomics PDF

Microeconomics UNIT:-1  ECONOMICS:- the branch of knowledge concerned with the production, consumption, and transfer of wealth/ Economics is the study of how people allocate scarce resources for production, distribution, and consumption, both individually and collectivel...

Microeconomics UNIT:-1  ECONOMICS:- the branch of knowledge concerned with the production, consumption, and transfer of wealth/ Economics is the study of how people allocate scarce resources for production, distribution, and consumption, both individually and collectively. Nature of Economics The nature of economics has a dual presence. Famous economist Robbins proposed that economics is a science that studies human behavior relating to the availability of scarce resources, while Alfred Marshall another renowned scientist defined economics as an art. Let us explore the nature of economics as science and art: 1. Economics as a Science British economist Lionel Robbins defined economics as a branch of social science that deals with human behavior as a relationship between the given ends and scarce resources which have alternative uses. Economics is considered a science because the scope of economics is based on several principles. It involves a systematic study of knowledge and facts. One example can be the process of economic research. As science deals with the relationship between cause and effect, this principle is implemented while collecting, classifying, and analyzing data for micro and macroeconomic research. 2. Economics as an Art Economics is defined as an art due to the presence and usage of various theories, concepts, and findings for achieving goals. According to economist Alfred Marshall, economics is the art of the practical application of scientific theories for attaining goals. The theories are explained through graphical representations defining the relationship between the economic variables and their application theories. This denotes the nature of economics as an art. Scope of Economics Economics deals with a wide variety of things. It comprises multiple principles and theories whose implications influence the economy of a country. When it comes to the scope of economics, it can be understood by the two branches of economics – Microeconomics and Macroeconomics. 1. Microeconomics Microeconomics is concerned with studying the micro elements of the economy of a nation. It deals with the individual units of an economy. Microeconomics studies the concept of product pricing along with the pricing of production factors, and the behavior of households, individuals, and firms. It enables us to analyze how these units allocate their scarce resources, their distribution, and utilization. The scope of microeconomics includes:  Demand & Supply  Production  Consumption  Economic welfare 2. Macroeconomics Macroeconomics deals with the macro units of an economy. It is the aggregate study of the elements of a country’s economy. Macroeconomics studies the entire economy of a nation as a whole. It deals with the overall production, total consumption, aggregate demand, and aggregate supply of a nation’s economy. Unlike microeconomics, macroeconomics deals with individual units on an aggregate basis. The scope of macroeconomics includes:  National income  General price level  Distribution  Employment Microeconomics Microeconomics studies how individual consumers and firms make decisions to allocate resources. Whether a single person, a household, or a business, economists may analyze how these entities respond to changes in price and why they demand what they do at particular price levels. Microeconomics analyzes how and why goods are valued differently, how individuals make financial decisions, and how they trade, coordinate, and cooperate. Within the dynamics of supply and demand, the costs of producing goods and services, and how labor is divided and allocated, microeconomics studies how businesses are organized and how individuals approach uncertainty and risk in their decision-making. Definition: According to K. E. Boulding Microeconomics is the study of particular firm, particular household, individual price, wage, income, industry and particular commodity. According to R. H. Leftwitch Microeconomics is concerned with the economic activities of such economic units as consumers, resource Owners and business firms. Scope of Microeconomics: In micro economics the following problems and theories are discussed: 1. Price Theory According to Prof. Robbins, human wants are unlimited but the resources to satisfy them are limited. Therefore, we face the problem of choice in wants and economy in means. This problem is solved by the price mechanism automatically. In other words, prices of all goods are determined by the equilibrium of demand and supply. So, demand and supply are discussed in micro economics. Each economic system has to make the decisions regarding what is to produced, how it is to be produced and how the resources to be allocated amongst the different competing uses. Such all, under capitalism, is performed with the help “Price Mechanism” i.e., those goods will be produced by the producers which maximize their profits; those techniques will be adopted which minimize their cost of production and the resources will be allocated in those uses where the resource command higher prices etc. Thus, in the micro economics, we deal with the problem of production, consumption, distribution and resource allocation. 2. Theory of Consumer Behaviour and Demand In this part, consumer’s behaviour is studied. It is examined how he satisfies his multiple ends with his scarce means e.g., why consumers purchase goods and which factors influence their decisions. In other words, theory of utility, concepts of demand and elasticity of demand are studied in it. As everyone has to face the problem of multiplicity of wants and limited money income. In such state of affairs, it is the desire of each consumer to maximize his satisfaction, when so happens the consumer is said to be in equilibrium. Much the micro economics deals with the problem of equilibrium. In order to describe consumer equilibrium basically we have two school of thoughts- Classical and Neo-classical. The classical economists presented the “Utility Approach” or “Cardinal Approach”, while the Neo-classical economists presented”. Indifference Curve Approach” or “Ordinal Approach”. In addition to these two approaches Professor Paul. A. Samuelson has also presented a theory of consumer behaviour which is known as “Revealed Preference Theory”. After having discussed the theories of “Satisfaction Maximization” the demand behaviour of a consumer with respect to a particular commodity is also considered in micro economic theory. 3. Theory of Production Behaviour In capitalism factories are in private ownership. Therefore, quantity of production of goods is decided by different firms individually. Every firm tries to get equilibrium or maximize its profit. For this purpose, a firm tries to find optimum combination of factors. Each student of Economics is well aware of with the four factors of production like land, labor, capital and entrepreneur. These factors are responsible for production activities. According to classical economists, in short run, the production depends upon the units of labor only while the capital etc. is kept fixed, In such state of affairs the total production increases at different rates. This phenomenon is known as “Law of Variable Proportions” in micro economic theory. 4. Theory of firm Behaviour: Like a consumer, the firm also wants to attain equilibrium. While the equilibrium of the firm is attached with “Minimization of Costs” or “Maximization of Output”. Both these situations are also known as “Optimum Factor Combination of a firm”, Thus to describe firm’s equilibrium or “optimum factor combination”, we have two approaches in micro economics (1) Classical’s Marginal Productivity theory (2 Neo-Classical’s “Isoquant – Iso Cot Approach”. 5. Theory of Costs and Revenues: In micro economics we study different types of costs of production. The analysis of costs of production may be from short run point of view as well as from long run point of view. In this context the traditional and modem approaches are adopted. Moreover, different types of revenues arc also considered in microeconomics. 6. Theory of Market Structure and Behaviour: The types of market like Perfect Competition, Monopoly, Duopoly and Monopolistic Competition are of greater significance for the readers of micro economics. Accordingly, here it is analyzed that how the firms under different market conditions make decisions regarding the determination of price and output. 7. Theory of Income Distribution: The national income of a country is the result of joint efforts of land, labor, capital and organization. Accordingly, the national income, has to be distributed amongst these factors. OR it is to be seen that how the factor prices like wages will determined in the competitive and nor competitive markets. Thus, for this purpose we have the classical and neo classical theories in microeconomics. 8. Theory of General Equilibrium: The Consumer equilibrium and the Producer equilibrium are the representatives of partial equilibria. But the existence of equilibrium of all the consumers of the economy or all the producers of the economy generates General equilibrium of consumption or production. Such all along with different criteria of welfare economics are the important issues of microeconomics. 9. Theory of Welfare Economics: In the present time, social as well as economic welfare has attained greater importance. Accordingly, the economists have to devise those measures and criteria which are aimed at creating efficiency and optimality in the economic system. Therefore, in microeconomics, we study different techniques which bring welfare to the people. 10. Economics of Uncertainty: Most of the traditional or classical economics is based upon certainty, i.e., the economic agents do not have to face risk while making decisions. But in the present time the element of risk has attained a lot of importance. Accordingly, economic theories are also being devised on the basis of uncertainty. Therefore, in microeconomics, we also study the economics of uncertainty. Uses / Importance / Advantages of Microeconomics: We can realize the importance of the study of micro economics from the following points. 1. Utility Maximization: It teaches us to purchase the required products in most suitable quantities so that the total utility obtained is maximized. Hence, Micro economic analysis explains us the optimum use of our income and by virtue of it enables us to avoid the wastage of hard- earned income. 2. Resource Allocation: By the study of micro economics we come to know how millions of consumers and producers allocate their consumption and production resources in an attempt to achieve their optimum level. 3. Income Distribution: By the distribution theories we learn the determination of rewards to factors of production in the form of rent, interest, wages and profit by which distribution of wealth takes place. Unequal distribution of income will lead to unequal distribution of wealth. It will then consequently provoke reaction to achieve fair and relatively equal distribution of income/wealth in a society. 4. Price Determination: The study of micro economics is highly helpful in understanding the determination of relative prices for the productive services rendered by different factors of production. 5. Optimization: It also helps entrepreneurs to achieve optimum production point with their budget constraint. By this, they can maximize their profit or at least they will minimize their losses. 6. Welfare Policies: It also helps to frame economic policies aimed at achieving public welfare e.g. tax exemption for the poor, determination of rewards according to qualification and productive capabilities, minimum wage laws etc. 7. Guidance for Consumers: It enables the consumers to allocate their 1ncome on different goods in such a way that total utility is maximized; thus, helping them to avoid the wastage of resources. 8. Guidance for Producers: It enables entrepreneurs to achieve the optimum combination of factors of production and thereby it enables them to maximize their profit: or at least minimize their losses. When the rewards of factors of production are determined in accordance with their marginal productivity, the chances of their exploitation are minimized. Thus, it enables labourers as well to achieve suitable rewards for their productive services. 9. Coordination Between Small Units of Economy: It also provides guidance for small segments of an economy to bear them well coordinated with each other. Moreover, the study of micro economics is essential to achieve the best outcome of macro policies. 10. Working of Economy: Microeconomics provides idea about working of the economy. It tells us about behaviour of consumer or firm. All such consumers and firms are part of the whole economy. 11. Predictions: Microeconomics is based on certain predictions. There are certain conditions that become basis of predictions. It explains that if some event happens then what. will be the result. If demand goes up the prices will go up. 12. Economic Policies: Microeconomics is used to formulate policies. it tells us effect of government policies on allocation of resources. The people can oppose new taxes. The government can adjust its policies through reaction of individuals. 13. Basis of Welfare Economics: Microeconomics is the basis of welfare economics. The individual firms and organisations pay taxes to the government. They can check whether the government has used that money for welfare of the people. 14. Management Decisions: Business decisions re made with the help of microeconomics. The analysis of demand and cost is essential. The management can use facts and figures to arrive at most suitable decision. 15. Basis of Whole Economy: Microeconomics is the basis of whole economy. Microeconomics studies small and individual units of the economy which later on becomes a base to study the economy as a whole. 16. Solves Problems of Firms: Microeconomics is helpful in solving the problems of individual firms. The working of firm is examined to know the real problem. The solution is made to handle such problem. Disadvantages / Limitations of Microeconomics: Following are the demerits of micro economic analysis and policies related to it. 1. Free Market Economy: Microeconomics is based on the idea of free market economy. In fact, there Is no free market economy after great depression of 1930. 2. Study of Parts: Microeconomics is concerned with study of parts but not the whole. In terms of individual terms, it is impossible to describe large and complex universe of facts like economic system. 3. Misleading for Analysis: Microeconomics is inadequate and misleading for analysis of economic problems. The principles relating to an individual household cannot be applied to the whole. economic system. 4. Full Employment: Microeconomics assumes that there is full employment. There is no full employment at all times in this world. Full employment is an exception in practical life. 5. Economic Instability: When every single firm it allowed to operate freely in an open economy, it would naturally go for self-interest; even at the cost of national interest. Thus, it would disrupt the cohesion between different productive units which will ultimately force the economy to move into depression. A free enterprise economy is therefore an unstable economy i.e. the economy which keep: on fluctuating with boom: and depressions. 6. Exploitation of Consumers: Inspite of proper guidance for the consumers the real-life situation reveals that they are exploited. This happens with the rising rate of inflation iii an economy. With the pace of inflation, on one hand, wealth keeps on concentrating in a few hands while, on the other hand, consumers are deprived of their purchasing power. The natural inequality of income distribution in a free enterprise economy leads to exploitation of consumers. 7. Exploitation of Labourers: Entrepreneurs exploit their labourers by keeping their wage rate low or even lower than their marginal productivity. This happens in three ways: (i) By forcing labourers to work for more hours than required under labour laws. (ii) By installing automatic and computerized plants to increase the marginal productivity of labour which is not followed by increase in their wage rate. (iii) By setting up production units in remote areas to employ labour at notoriously low wage rate. 8. Absence of Large-Scale Production: Micro economic analysis encourages setting up of small units for growth of economy. This could possibly be achieved more efficiently by initiating and encouraging large scale production. 9. Unrealistic Assumptions: Micro economics is based on unrealistic assumptions, especially in case of full employment assumption which does not exist practically. Even behaviour of one individual cannot be generalised as the behaviour of all. 10. Inadequate Data: Micro economics is based on the information dealing with individual behaviour, individual customers. Hence, it is difficult to get correct information. So, because of incorrect data Micro Economics may provide inaccurate results. Key Terms Term Definition all of the quantities of a good or service that buyers would be willing and able to buy at all possible prices; demand is represented demand graphically as the entire demand curve. a table describing all of the quantities of a good or service; the demand schedule is the data on demand price and quantities demanded that can be used schedule to create a demand curve. a graph that plots out the demand schedule, which shows the relationship between price and demand curve quantity demanded all other factors being equal, there is an inverse relationship between a good’s price and the quantity consumers demand; in other words, the law of demand is why the demand curve is downward sloping; when price goes down, law of demand people respond by buying a larger quantity. the specific amount that buyers are willing to purchase at a given price; each point on a quantity demand curve is associated with a specific demanded quantity demanded. change in a movement along a demand curve caused by a quantity change in price; a change in quantity demanded demanded is a movement along the same curve when buyers are willing to buy a different change in quantity at all possible prices, which is demand represented graphically by a shift of the entire  Term Definition demand curve; this occurs due to a change in one of the determinants of demand. changes in conditions that cause the demand curve to shift; the mnemonic TONIE can help you remember the changes that can shift determinants demand (T-tastes, O-other goods, N-number of of demand buyers, I-income, E-expectations) a good for which demand will increase when normal good buyers’ incomes increase. a good for which demand will decrease when inferior good buyers’ incomes increase. goods that can replace each other; when the substitute price of a good increases, the demand for its goods substitute will increase. goods that tend to be consumed together; when complement the price of a good increases the demand for its goods complement will decrease. What is demand? Demand simply means a consumer’s desire to buy goods and services without any hesitation and pay the price for it. In simple words, demand is the number of goods that the customers are ready and willing to buy at several prices during a given time frame. Preferences and choices are the basics of demand, and can be described in terms of the cost, benefits, profit, and other variables. The amount of goods that the customers pick, modestly relies on the cost of the commodity, the cost of other commodities, the customer’s earnings, and his or her tastes and proclivity. The amount of a commodity that a customer is ready to purchase, is able to manage and afford at provided prices of goods, and customer’s tastes and preferences are known as demand for the commodity. Suggested reading: Elasticity of Demand The demand curve is a graphical depiction of the association between the price of a commodity or the service and the number demanded for a given time frame. In a typical depiction, the cost will appear on the left vertical axis. The number (quantity) demanded on the horizontal axis is known as a demand curve. Determinants of Demand There are many determinants of demand, but the top five determinants of demand are as follows: Product cost: Demand of the product changes as per the change in the price of the commodity. People deciding to buy a product remain constant only if all the factors related to it remain unchanged. The income of the consumers: When the income increases, the number of goods demanded also increases. Likewise, if the income decreases, the demand also decreases. Costs of related goods and services: For a complimentary product, an increase in the cost of one commodity will decrease the demand for a complimentary product. Example: An increase in the rate of bread will decrease the demand for butter. Similarly, an increase in the rate of one commodity will generate the demand for a substitute product to increase. Example: Increase in the cost of tea will raise the demand for coffee and therefore, decrease the demand for tea. Consumer expectation: High expectation of income or expectation in the increase in price of a good also leads to an increase in demand. Similarly, low expectation of income or low pricing of goods will decrease the demand. Buyers in the market: If the number of buyers for a commodity are more or less, then there will be a shift in demand. You may also want to know: What are the Shifts in the Demand Curve? Types of Demand Few important different types of demand are as follows:  1. Price demand: It refers to various types of quantities of goods or services that a customer will buy at a quoted price and given time, considering the other things remain constant. 2. Income demand: It refers to various types of quantities of goods or services that a customer will buy at different stages of income, considering the other things remain constant. 3. Cross demand: This means that the product’s demand does not depend on its own cost but depends on the cost of the other related commodities. 4. Direct demand: When goods or services satisfy an individual’s wants directly, it is known as direct demand. 5. Derived demand or Indirect demand: The goods or services demanded or needed for manufacturing the goods and satisfying the consumer indirectly is known as derived demand. 6. Joint demand: To produce a product there are many things that are related to each other, for example, to produce bread, we need services like an oven, fuel, flour mill, and more. So, the demand for other additional things to produce a product is known as joint demand. 7. Composite demand: A composite demand can be described when goods and services are utilised for more than one cause. Example: Coal The Law of Demand The law of demand is interpreted as ‘the quantity demanded of a product comes down if the price of the product goes up, keeping other factors constant.’ In other words, if the cost of the product increases, then the aggregate quantity demanded decreases. This is because the opportunity cost of the customers increases that leads the customers to go for any other substitute or they may not purchase it. The law of demand and its exceptions are really inquisitive concepts. Consumer proclivity theory assists us in comprehending the combination of two commodities that a customer will purchase based on the market prices of the commodities and subject to a customer’s budget restriction. The amount of a commodity that a customer actually purchases is the interesting part. This is best elucidated in microeconomics utilising the demand function. Consumer Equilibrium The term equilibrium defines a state of rest from where there is no tendency to change anything. A consumer is observed to be in the state of equilibrium when he/she does not aspire to change his/her level of consumption i.e. when he/she attains maximum satisfaction. Therefore, consumer equilibrium refers to the situation when the consumer has attained maximum possible satisfaction from the number of commodities purchased given his/her income and price of the commodity in the market. Read the article below to understand more about consumer equilibrium. What is Consumer Equilibrium? A consumer is said to be in an equilibrium state when he feels that he cannot change his situation either by earning more or by spending more or by changing the number of things he buys. A rational consumer will purchase a commodity up to the point where the price of the commodity is equivalent to the marginal utility obtained from the thing. If this condition is not fulfilled, the consumer will either purchase more or less. If he purchases more, the MU will fall and situations will arise when the price paid will exceed marginal utility. In order to prevent negative utility, i.e. dissatisfaction, he will reduce his consumption and MU will go on increasing till price = marginal utility. On the other hand, if marginal utility is greater than the price paid, the consumer will enjoy additional satisfaction from the unit he has consumed beforehand. This will urge him to buy more and more units of commodity leading to successive falls in MU till it gets equal to price. Hence, by buying more or less quantity, a consumer will eventually reach a point where P= MU. Here, his total utility is maximum. Importance of Consumer Equilibrium  It enables consumers to maximize his/her utility from the consumption of one or more commodities.  It helps the consumers to arrange the combination of two or more products based on consumer taste and preference for maximum utility. What are the Assumptions for Attaining Consumer Equilibrium in the Case of Single Commodity? In the case of a single commodity, let’s assume:  The purchase would be restricted only to the single commodity  The price of the commodity is already given in the market. The consumer only determines how much he needs to purchase at a given price.   Being a rational human being, the goal of a consumer is to maximize the consumer surplus which implies the surplus of utility he earns over his expenditures on the good at the point of purchase.  There are no limitations on the consumer expenditure i.e. he has sufficient money to buy whatever quantity he decides to buy at a given price. What are the Assumptions for attaining Consumer Equilibrium in the Case of Two or More Commodities? In the case of two or more commodities, let’s assume:  The consumer purchases only two goods i.e. A and B.  The price of both the goods is already given in the market. The consumer cannot change or influence the price of both the goods. He can only decide how much to buy of these goods at a given price.  The consumer's income to be spent on these goods is already given and is constant.  The consumer is a rational human being and his goal is to maximize the (cardinal) amount of utility from his purchase and consumption of the goods subject to his constraints. What are the Conditions for Consumer Equilibrium in the Case of Single Commodity? In the case of a single commodity, the consumer equilibrium can be explained on the basis of the law of diminishing marginal utility. The law of diminishing marginal utility states that as consumers consume more and more units of commodities, the marginal utility derived from each successive unit goes on diminishing. Therefore, how consumers decide how much to purchase depends on the following two factors.  The price for each unit which he/she pays is given  The utility he/she gets While purchasing a unit of a commodity, a consumer compares the price of the given commodity with its utility. The consumer will be at an equilibrium stage when marginal utility (in terms of money) gets equal to the price paid for the commodity say ‘X’ i.e. MUx = Px Note: Marginal utility in terms of money is calculated by dividing marginal utility in utils by marginal utility of one rupee. In case MUx > Px, In the case when MUx is greater than price, the consumer goes on buying the commodity because she is paying less for each additional amount of satisfaction he is getting. As she buys more, MU will fall and situations will arise when the price paid will exceed marginal utility ( the concept of the law of diminishing marginal utility is applied here). In order to avoid this situation i.e. dissatisfaction, he will minimize his consumption and MU will go on increasing till MUx = Px. This is the state of equilibrium. In case MUx < Px, In the case when MUx is less than price,, the consumer will have to minimize his consumption of the commodity to raise his total satisfaction till MU becomes equal to price. This is because she is paying more than the additional amount of satisfaction she is getting. In the case of a single commodity, the consumer equilibrium can be well- explained with the help of an example given below. Example: In the below example, assume that the consumer wants to buy goods that are priced at Rs.10 per unit. Also, assume that MU obtained from each successive unit is determined. Assume that 1 util is equals to Re.1 Number of Price MUx (Utils) MUx Difference Remarks Units (Px) (1 Util Consumed = (X) Re.1) 1 10 20 20/1 = 10 MUx > Px 20 2 10 16 16/1 = 6 Consumer will 16 increase the consumption 3 10 10 10/1 = 0 MUx = Px 10 Consumer Equilibrium 4 10 4 4/1 = -6 MUx < Px 4 5 10 0 0/1 = -10 Consumer will 1 decrease the consumption 6 10 -2 -2/-1 = -12 -2 In the above table, we can see that the consumer will be at equilibrium when he buys 3 units of commodity X. He will increase his consumption beyond 2 units as MUx > Px. The consumer will not consume 4 units or more of the commodity X as MUx < Px. What are the Conditions for Consumer Equilibrium in the Case of Two or More Commodities? The law of diminishing marginal utility is not applied in the case of two or more commodities. In real-life scenarios, a consumer normally consumes more than one commodity. In such a situation, the law of equity-marginal utility is applied as it helps him to determine the optimum allocation of his income. The law of equi-marginal utility states that a consumer should spend his limited income to purchase different commodities in such a way that the last rupee spent on each commodity provides him equal marginal utility in order to attain maximum satisfaction. According to the law of equi-marginal utility, a consumer will be in equilibrium when the ratio of marginal utility of one commodity to its price is equal to the ratio of marginal utility of another commodity to its price. Let us assume that consumers buy two goods i.e. X and Y. Then the equilibrium price stage will be at MUx/Px = MUY/PY = MU of the last rupee spent on each commodity or simply can be said MU of Money. MUxPx = MUyPy = MUzPz = MU money - MU money Similarly, if there are three commodities i.e. X, Y, Z then the condition of equilibrium, in this case, will be simply MY Money. Thus, to attain an equilibrium position 1. Marginal utility of the last rupee spent on each good is the same. 2. Marginal utility of a commodity falls as more of it is consumed. Let us understand the consumer’s equilibrium in the case of two commodities with an example. Suppose a consumer has to spend ₹. 24 on two commodities i.e. X and Y. Further, assume that the price of each unit of X is 2 and that of Y is 3 and his marginal utility schedule is given below. Number of Units MUx MUxPx MU y MUyPy Consumed (X) (A rupee worth of (A rupee worth of Mu) Mu) 1 20 20/2 = 10 24 24/3 = 8 2 18 18/2 = 9 21 21/3 = 7 3 16 16/2 = 8 18 18/3 = 6 4 14 14/2 = 7 15 15/3 = 5 5 12 12/2 = 6 12 12/3 = 4 6 10 10/2 = 5 9 9/3 = 3 To attain the maximum satisfaction from spending his income of ₹. 24, the consumer will buy 6 units of X by spending Rs. 12 ( 2 × 6 = Rs.12) and 4 units of Y by spending Rs. 12 ( 2 × 6 = Rs. 12). This combination of goods gives him maximum satisfaction (or state of equilibrium) because a rupee worth of MU in the case of good X is 5 i.e. MUxPx =  102102 In the case of good Y also. It is 5 i.e. MUyPy = 153153 (= MU of the last rupee spent on each good) Note: Consumer’s maximum satisfaction is determined by the budget constraints i.e. the amount of money spent by consumers (₹24 in this example). Conclusion To sum up what consumer equilibrium is? Consumer Equilibrium refers to the situation when a consumer is enjoying maximum satisfaction with limited income and has no propensity to change his way of existing expenditure. The consumer has to pay a price for each unit of the commodity he consumes. So, he cannot purchase or consume an unlimited quantity of commodities. In the case of a single commodity, the consumer attains an equilibrium position when the marginal utility of a good in terms of money gets equivalent to the price of that good. Indifference Curve What is Indifference Curve? An indifference curve is a graphical representation of a combined products that gives similar kind of satisfaction to a consumer thereby making them indifferent.Every point on the indifference curve shows that an individual or a consumer is indifferent between the two products as it gives him the same kind of utility. Indifference Curve Analysis The indifference curve analysis work on a simple graph having two-dimensional. Each individual axis indicates a single type of economic goods. If the graph is on the curve or line, then it means that the consumer has no preference for any goods, because all the good has the same level of satisfaction or utility to the consumer. For instance, a child might be indifferent while having a toy, two comic book, four toy trucks and a single comic book. Indifference Map The Indifference Map refers to a set of Indifference Curves that reflects an understanding and gives an entire view of a consumer’s choices. The below diagram shows an indifference map with three indifference curves. Here, we understand that all three products resting in the indifferent curve give him the same satisfaction. However, his preference for those combined products can be arranged in the order of preference. Following are the features of indifference curve (a) INDIFFERENCE CURVE  An indifference curve has a negative slope, i.e. it slopes downward from left to ALWAYS SLOPES right. DOWNWARDS FROM LEFT  Reason: If a consumer decides to have one more unit of a commodity TO RIGHT (say apples), quantity of another good (say oranges) must fall so that the total satisfaction (utility) remains same. (a) INDIFFERENCE CURVE  IC is strictly Convex to origin i.e. MRSxy is always diminishing IS ALWAYS CONVEX TO  Reason: Due to the law of diminishing marginal utility a consumer is always THE ORIGIN willing to sacrifice lesser units of a commodity for every additional unit of another good. (c) HIGHER INDIFFERENCE  Higher indifference curve represents larger bundles of goods i.e. bundles which CURVE REPRESENTS contain more of both or more of at least one. HIGHER LEVEL OF  It is assumed that consumer’s preferences are monotonic i.e. he always prefers larger bundle as it gives him higher satisfaction. SATISFACTION  In the diagram, IC1 and IC2 are the two indifference curves. IC2 is the higher indifference curve than IC1.  Combination ‘L’ contains more of both goods ‘X’ and Y than combination ‘M’ on IC1. Hence IC2 curve gives more satisfaction