Consumer Equilibrium

So Budget line defines consumer resource boundary

which is pushing down
and Indifference curve defines his map of needs &
wants, higher the better
The optimal (rational) decision of the consumer is to
buy the combination two goods in such a way that he
is on the highest possible curve which also touches
the budget line.
Means highest happiness which is affordable too
And as IC’s are inward bent so it has to be touching
Budget Constraint only once if it is the highest
possible.
Optimization: What the
Consumer Chooses

A is the optimum: Quantity

the point on the of Mangos
The
The optimum
optimum
budget constraint that is
is the
the bundle
bundle
touches the highest Consumer
Consumer most most
possible indifference 1200 prefers
prefers out out of
of all
all
curve. the
the bundles
bundles hehe
can
can afford.
afford.
Consumer prefers B to A, B
but he cannot afford B. 600
A

Consumer can afford C C

and D,
but A is on a higher D
indifference curve.
150 300 Quantity
And C is not optimal
of Fish
The Effects of an Increase in Income
Quantity
of Mangos
An increase in
income shifts the
budget constraint
outward.
B
If both goods are A
“normal” Consumer
buys more of each.

Quantity
of Fish
The Effects of a Price Change
Quantity
Initially,
of Mangos
PF = $4
1200
PM = $1 initial
optimum

PF falls to $2 new
optimum
budget constraint 600
rotates outward, 500
(Why?)
Consumer buys
more fish and
150 300 600 Quantity
fewer mangos. 350 of Fish
(why?)
 IC Map
Type of goods.
Normal Good: Quantity
The products which we buy of HQ Mangos
more when we have higher A few of Consumer’s
income indifference curves
Inferior Good:
The products which we buy
less when we have higher I2
income
Consider the case of HQ I1
mangoes and LQ mangoes
How we can show increase I0
of income? Quantity
What difference is there? of LQ
mangoes
Types of goods
Beneficial Good (Good)

As rational person know which is beneficial and which is harmful, so

Goods are those products which we want to consumer more. Such
that 2 units of good is better than 1 unit of same good

Harmful Good (Bad)

Bads are those products which we want to get rid off. Such that 1
unit of bad is better than 2 units of bad

Examples??

Food is example of beneficial goods

Garbage is example of harmful goods
Tracing Change in prices
Initially, Quantity
of Mangos
PF = $4
1200
PM = $1 initial
optimum

PF falls to $2 Optimum 1

600 Optimum 2
It increases Qf seen 500
at optimum 1
PF falls to $1

It increases Qf seen 150 300 600 Quantity

at optimum 2 350 650 of Fish
 Prices and Quantity of Fish
When we plot price of a product and quantity of the product we get the demand curve

Quantity Price of
of Mangos Fish Demand
4 A Curve
1200
price Rs4

Price Rs2 B
2
600 Price Rs1
500
C
1

150 300 600 Quantity 150 350 650

350 650 of Fish Quantity of Fish
 CONCLUSION:
Do People Really Think This Way?

• People do not make spending decisions

by writing down their budget constraints and
indifference curves.
• Yet, they try to make the choices that maximize their
satisfaction given their limited resources.
• Hence these models just describe how an agent will
react, the calculation of utility is not necessary

• What does you as a consumer understand from this?

• What does these theories help to producer?