A consumer attains his equilibrium when he maximizes
his total utility, given his income and the prices of the two commodities. We
combine the indifference curve and the budget line to get consumer’s equilibrium.
Two condition is needed for the consumer to be in
equilibrium.
1) MRSxy = Px/Py
MRSxy
refers marginal
rate of Substitution- It is the rate at which consumer is willing to
substitute one good for another without changing the level of satisfaction.
For example: There are two commodities food(X) and
clothing (Y).The marginal rate of
Substitution X for Y is defined
as the amount of X(food) the consumer is willing to give up to get one
additional unit of Y(clothing) while maintaining the same level of
satisfaction.
Given the amount of money which the consumer wants
to spend on two commodities and given the prices of the two commodities, we can
draw a budget line.
A
budget line is a negatively sloping line as if a
consumer wants to purchase more of one commodity, he has to sacrifice some
amount of the other commodity. Its slope
depends on the prices of the two commodities i.e. Px/Py
Thus,
the budget line shows the various combination which the consumer can afford to
buy with his given budget and given prices of the two goods, the indifference
map shows the consumer scale of preferences between various combinations of two
goods.
