Consumer’s Equilibrium:

Maximising satisfaction
• A consumer is said to be in equilibrium when
he is buying such a combination of goods as
leave him with no tendency to rearrange his
purchase of goods.
• In Indifference Curve (IC) technique, the
consumer’s equilibrium is discussed in respect
of the purchases of the two goods by the
consumer.
Assumptions:
1. The consumer tries to maximise his
satisfaction.
2. He has a given indifference map exhibiting
his scale of preferences for various
combinations of two goods, X & Y.
3. He has a fixed amount of money to spend on
the two goods. He has to spend whole of his
given income on the two goods.
4. Prices of the goods are given & constant for
him. He cannot influence the prices of the
goods by buying more or less of them.
5. Goods are homogeneous & divisible.
 Fig.1
Illustration.
• Fig. 1 depicts Y
consumer’s
indifference map
B
together with the R•
G
budget line BL. o S•
o
• With given money to d
be spent & given prices Y
N Q•

of the two goods, the IC4

IC5

consumer can buy any •T IC3

• H IC2
combination of the IC1

goods which lies on the 0 M L X

budget line. Good X

• Budget line forces the consumer to remain on
the given budget line.
• The various combination on the budget line lie
on different ICs.
• The consumer will choose that combination
on BL which lies on the highest possible IC.
• In fig.1, the budget line BL is tangent to IC3 at
point Q.
• Combination of goods represented by R costs
the consumer the same as Q.
• But, because R lies on a lower IC, i.e. IC1, it
will be rejected in favour of Q.
• Similarly, combination of goods represented
by S costs the consumer the same as Q.
• But, because S lies on a lower IC, i.e. IC2, it
will be rejected in favour of Q.
• Therefore, Q will be preferred to all other
points to the right of Q on BL, such as T & H.
• Therefore, of all possible combinations lying
on BL, Q lies on the highest possible
indifference curve, IC3 which yields maximum
possible satisfaction.
• Combinations lying on indifference curves IC4
& IC5 will give greater satisfaction to the
consumer than Q, but are unattainable with
the given money income & prices of the
goods.
• Therefore, the consumer will be in equilibrium
position at Q at which the budget line BL is
tangent to the indifference curve IC3.
• The consumer will buy OM amount of good X
& ON amount of good Y.
• Slope of the IC shows the MRSxy while slope
of the budget line indicates the ratio between
the prices of the two goods Px/Py.
• Thus, at equilibrium point Q,
MRSxy = Px/Py
• When MRSxy is greater than the price ratio
(such as points R & S) or less than the price
ratio (such as points T & H), it is advantageous
for the consumer to substitute one good for
the other until the MRSxy becomes equal to
the price ratio.
• Therefore, the first condition (necessary
condition) for the equilibrium of the consumer
is that ‘the given budget line must be tangent
to the indifference curve or the MRSxy must be
equal to the price ratio Px/Py’
Second order condition.
• ‘At the point of equilibrium, IC must be convex
to the origin.’
OR
• The MRSxy must be falling at the point of
equilibrium.
Illustration.
• In fig.1, the indifference curve IC3 is convex to
the origin at Q.
• At point Q, both conditions of equilibrium are
satisfied.
• Q is the optimum or best choice for the
consumer & therefore, he will be in stable
equilibrium at Q.
• In fig.2, budget line BL is Fig.2
Y
tangent to IC1 at point J &
so
MRS xy = Px/Py at point J.
• But J cannot be a point of B
equilibrium because
G
satisfaction would not be o •U
maximised there. o
d •J
• Points U & T that also lie
on BL will be on Y •T
IC3
IC4

indifference curve higher IC1

IC2

than IC1 (where J lies).

• Thus, by moving from L
0 X
point J to points U or T,
the consumer obtains Good X

greater satisfaction.
Conclusion:
For the consumer to be in equilibrium, the
following conditions are required:
1. A given budget line must be tangent to an
indifference curve, or, MRSxy must be equal
to the price ratio of the two goods, Px/Py.
2. Indifference curve must be convex to the
origin at the point of tangency.
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