CONSUMER EQUILIBRIUM- IC ANALYSIS

Combination Food Clothing
12
A1 6
4
B2 3

C3

D4

(1) The consumer acts rationally so as to maximise satisfaction.

(2) There are two goods X and Y

(3) The consumer possesses complete information about the prices of the goods
in the market.

(4) The prices of the two goods are given.

(5) The consumer’s tastes, habits and income remain the same throughout the
analysis.

(7) Ordinal utility- Consumer can rank preferences

(6) Monotonic Preference-Consumer prefers a bindle which contains more of
atleast one commodity and no less of the other commodity.

7) Transitivity of choice- X  Y, Y  Z then X Z.

8) Consistency of choice- If X  Y then under no circumstances Y  X

9) Diminishing Marginal Rate if substitution- With every increase in consumption of a
commodity the consumer will be willing to forgo lesser and lesser units of the other
commodity. This assumption results in convexity of IC.

Marginal Rate of Substitution (MRS)is the slope of IC. It is the rate at which the consumer
is prepared to exchange Good-Y for Good- X keeping the satisfaction level unchanged.


=

It is the ratio of number of units of Good- Y forgone to get an additional unit if Good- X.

Combination Food(X) Clothing(Y) The principle of
A 1 12 =
B 2 6 DMRS is an
C 3 4 12
D 4 6 extension of
2
DMU.

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The Indifference Map is the
graphical representation of two or
more indifference curves showing
the several combinations of different
quantities of commodities, which
consumer consumes, given his
income and the market price of
goods and services.