CONSUMER’S EQUILIBRIUM OR MAXIMIZING SATISFACTION
Let us explain, with the help of indifference curve. how a consumer reaches an equilibrium po ition. The
consumer is said to be in equilibrium when he obtains the maximum possible satisfaction from his purchases. given the prices in the market and the amount of money he has for making purchases.
In terms of Marshallian or utility analysis. a consumer is said to be in equilibrium, in case or one COIllrnodity, when its price and nuuginal utility have been equated. When we are considering more than one commodity. a consumer’s expenditure is completely adjusted (or he is in equilibrium) whcn marginal utilities of money in each direction of his purchase have been equalised (or marginal utilities are in proportion to the prices. see chapter 5) and thus maximum satisfaction obtai lied according.
Thus, if our consumer chooses a combination of mangoes and apples represented by S, he will be on a
lower indifference curve lei and will thus be getting less satisfaction than when he choose the point P and is on a higher indifference curve Ie)” The combination represented by point N will also give him less satisfaction, because it lies on indifference curve lez’ which is also lower than Ie3 at which P lies. Similarly, all other points on the price line to the left of P will be less attractive in the estimation of our consumer than p. Likewise on all points to the right of P on the price line AM, such as K and L, the consumer will not be in equilibrium because all of them lie on indifference curves lower than.
In equilibrium at point P, the marginal rate of substitution (MRS) of mangoes for apple is equal to the
price ratio between these two good , since both the indifference curve leI and the price line AM have the
same slope at point P (MRS of mangoes for apples is given by the slope of the indiffcreice curve and the
price ratio is given by the slope of the price line AM). Thus, at point P