Conditions Or Assumptions Of Equilibrium

by • 24/06/2011 • B.COM PART 1 EconomicsComments (0)707

 

  • Consumer is rational and tries to maximize his satisfaction.
  • Income of the consumer is fixed and given.
  • Prices of X and Y are given in the market and consumer cannot change them.
  • Units of X and Y are same in quantity and are not divisible.

Now suppose,

  • Income of consumer is Rs. 20
  • Price of commodity X is Rs. 2 and consumer can purchase max. 10 units of X.
  • Price of commodity X is Rs. 1 and consumer can purchase max. 20 units of Y.
  • Consumer budget line is AB.
  • Consumer spends 10 Rs. On purchasing 5 units of X commodity.
  • Consumer spends 10 Rs. On purchasing 10 units of Y commodity.
  • Consumer’s equilibrium will be on point E where IC2 touches the budget line AB.

Consumer’s equilibrium can be explained by means of the following diagram.

In graph, IC-3 provides a higher satisfaction but it is above budget line AB and is beyond the reach of a consumer. IC-1 is below the budget line AB and is the lowest one, which provides less satisfaction. AC-1 provides more satisfaction. This curve is also tangent on budget line at E, here the consumer will purchase both X and Y goods and will spend all his income and will obtain maximum possible satisfaction and will be in Equilbirum position.

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