Consumer's Equilibrium

Concept of Budget Line

Higher IC gives or yields a higher level of satisfaction or higher utility than lower IC, according to the concept of indifference map. Therefore, a utility-maximizing consumer would aim to have his IC map's indifference curve as high as it can be. However, it is believed that the consumer has a modest income. As a result, it represents a budget line that represents the consumer's purchasing power. The budget line, often known as the budget restriction, is a locus that represents different pairings of two commodities that can be bought with fixed revenue.

Mathematically, the budgetary constraint assuming a two commodity model may be expressed as equational form:

PX X QX + PY X QY = B .... (i)

Where, PX = Price of X good, Qx = Quantity of X good, PY = Price of Y good, QY =Quantity of Y good and B = Consumer's budget or money income.

The equation shows that a consumer, given his income at constant market prices of X and Y, can purchase only a limited quantity of the two goods (i.e. Qx and Qy). From equation (i), QX and QY can be worked out as follows:

QX = B / Px -PY / PX * QY ...(ii)

Qy = B / Py -Px / Py * Qx ...(iii)

Consumer's Equilibrium

When a consumer acquires a combination of items that prevents him from feeling the need to reorganize his purchases, he is said to be in equilibrium. When it comes to dividing his financial outlay between various products, he is then at a balanced or ideal level.

Assumptions:

• Consumers need to be sensible.
• Consumer needs to have a map of their apathy and budget.
• Two goods' prices remain the same or constant (i.e. PX, PY).
• The producer must spend a set amount of money on two products in order to maximize utility.

Conditions:

• Necessary Condition: Budget line is perpendicular to indifference curve [or indifference curve's slope is equal to budget line's slope, i.e. MRSXY = PX / PY]                                     
• Sufficient Condition: The inequality curve must be convex to the origin.

Criticisms of indifference curve analysis

The following reasons are given for criticizing the indifference curve approach:

• The structure of the indifference curve approach is unsound. Although it is predicated on the idea that customer tastes and preferences are stable, the entire structure of the indifference map crumbles and the analysis loses all relevance if consumer tastes and preferences change as a result of advertising propaganda, fashion, and other factors.
• The indifference curve makes the same presumption as the cardinal utility approach: that the consumer is rational. He has a calculating or intelligent mind and has a wide variety of combinations of different goods in his head. The products can be switched out for one another. He evaluates their overall utilities or degree of satisfaction and chooses or decides between various product combinations based on logic. In practice, the customer is constrained by a number of economic, legal, and social factors.
• The combinations are frequently nonsensical since the nature of the items is removed from them. How many of us buy five scooters, four vehicles, seven watches, ten pants, and eight radios? For the consumer, these pairings imply nothing.
• It is unwarranted to assume that when a good's price drops, consumers buy more of it or acquire more units of it. Aside from the situation when the product is subpar, he might not want more than one unit of a product because he practices "conspicuous consumption" and wants to show off or have variety. The consumer's choice for the goods is also influenced by changes in his preferences or by speculative purchases. The indifference analysis is a constrained examination of customer behavior because of these exclusions.
• The examination of the indifference curve does not take into account speculative demand, the interconnectedness of consumer preferences in the shape of a snob, Veblen and bandwagon effects, the influence of advertising, of stocks, etc.
• Again, the two goods model on which the indifference analysis is based renders the theory implausible because a consumer purchases many more things to satisfy his numerous demands than just two. However, the problem is that geometry fails when there are more than three commodities, and economists must rely on challenging mathematical methods to understand the issue of consumer behavior.

Reference

Koutosoyianis, A (1979), Modern Microeconomics, London Macmillan