Assignment on Consumer Equilibrium and Demand Curve
Explain on the basis of
Indifference Curve Analysis
, how a consumer attains equilibriumin his purchase decision? Derive the
from that analysis.
reveals the various combinations of two products or services towhich the customer is indifferent at a particular level of income. Any combination of products or services on an indifference curve will give the same level of utility. Theindifference curve is based on the following assumptions:
Indifference curves have a negative slope
Indifference curve slopes downward to the right, which reveals that the consumer prefers more of a particular product. Given the choice between two products in anindifference curve, if the consumer displays decreased demand for one product,naturally the demand for the other product goes up.
Indifference curves cannot intersect each other
If indifference curves intersect each other, it means that a consumer has twodifferent levels of utility for the two products. Higher level of indifference curve showshigher levels of utility.This concept can be explained with the help of Marginal Rate of substitution:The
Marginal Rate of Substitution
(MRS) is the rate at which a customer is willing tosubstitute one product for the other maintaining the same level of utility.The Ratio of the Marginal Utility of the two products and the rate at which a consumer iswilling to trade one product for another can be derived by measuring the marginal rate of substitution between them keeping the Total Utility constant.To explain the concept better, let’s take the example of two products – pastry and patties.Consuming an additional unit of patties causes total utility to increase while the marginalutility is positive. On the other hand, reducing the consumption of pastries causes totalutility to decrease, marginal utility being negative. For total utility to remain unchanged, thegain in total utility due to the increased consumption of patties must exactly offset thereduction in total utility due to the reduced consumption of pastries.
Consumption of two Products that yield same level of utilityUtilityQuantity of Pastries ConsumedQuantity of Patties Consumed
Sujeet Kumar MBA 1
SemesterRoll No. 25