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Geometry: Indifference Curve, Budget Line, Equilibrium of Consumer Essay

Research the Following:

1. Indifference Curve – An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility. Definition: An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility. Each point on an indifference curve indicates that a consumer is indifferent between the two and all points give him the same utility.

Description:

Graphically, the indifference curve is drawn as a downward sloping convex to the origin. The graph shows a combination of two goods that the consumer consumes.

The above diagram shows the U indifference curve showing bundles of goods A and B. To the consumer, bundle A and B are the same as both of them give him the equal satisfaction. In other words, point A gives as much utility as point B to the individual. The consumer will be satisfied at any point along the curve assuming that other things are constant.

2. Budget Line – A graphical depiction of the various combinations of two selected products that a consumer can afford at specified prices for the products given their particular income level. When a typical business is analyzing a two product budget line, the amounts of the first product are plotted on the horizontal X axis and the amounts of the second product are plotted on the vertical Y axis.

-A consumer’s budget line characterizes on a graph the maximum amounts of goods that the consumer can afford. In a two good case, we can think of quantities of good X on the horizontal axis and quantities of good Y on the vertical axis. The term is often used when there are many goods, and without reference to any actual graphs.

Example: Rose Bole has only $100 to spend on her two passions in life: buying books and attending movies. If all books cost $5.00 and all movies cost $2.50 (these are simply assumptions to make the problem easier–as is the assumption that only two items are involved in the problem), the graph below¬†shows the options open to Rose. The budget line is a frontier showing what Rose can attain.

3. Equilibrium of Consumer – Consumer Equilibrium can be explained as the point where a consumer gets the maximum amount of satisfaction from the choice he makes between 2 or more competing products. Any deviation from this point results in less satisfaction. For example, a consumer with limited income may wish to purchase both fruit and vegetables. However, the more fruit he buys, the less vegetable he can purchase and vice versa. The consumer equilibrium point will be a point at which he can purchase enough of each to gain the maximum satisfaction with his purchase decision.

Example:

The weekly demand and supply schedule for a brand of soft drink at various prices (between 30p and £1.10p) is shown opposite.

Equilibrium
As can be seen, this market will be in equilibrium at a price of 60p per soft drink. At this price the demand for drinks by students equals the supply, and the market will clear. 500 drinks will be offered for sale at 60p and 500 will be bought – there will be no excess demand or supply at 60p.


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