Please refer to Economics Consumer Equilibrium Indifference Curve Analysis Class 12 Economics Notes and important questions below. The Class 12 Economics Chapter wise notes have been prepared based on the latest syllabus issued for the current academic year by CBSE. Students should revise these notes and go through important Class 12 Economics examination questions given below to obtain better marks in exams
Consumer Equilibrium Indifference Curve Analysis Class 12 Economics Notes and Questions
The below Class 12 Consumer Equilibrium Indifference Curve Analysis notes have been designed by expert Economics teachers. These will help you a lot to understand all important topics given in your NCERT Class 12 Economics textbook.
1. Rationality- It is assumed that consumer behave in a rational manner with an objective to attain maximum level of satisfaction.
2. Ordinal Utility- It means utility from consumption of a product can’t be measured rather it can be only given rank, order or position.
3. Non-Satiety/ Monotonic Preference- It means consumer always prefer that combination of goods which contains more quantity of either one or more goods because consumption of more goods provides more satisfaction.
4. Transitivity- It establishes transparent relationship between two or more goods. Eg. If Samsung is preferred more than Nokia, and Nokia is preferred more than LG. Then Samsung is preferred more than LG.
5. Diminishing Marginal Rate of Substitution-
Marginal Rate of Substitution is the rate at which a consumer is willing to pay units of good Y to get one more unit of good X without any loss of satisfaction.
It is the slope of Indifference Curve.
Marginal Rate of Substitution keeps on diminishing due to the Law of Diminishing Marginal Utility. As a consumer consumes more and more units of good X, his Marginal Utility from good X keeps on diminishing. Therefore, consumer would like to pay less and less units of good Y to get one more unit of good X.
Properties of Indifference Curve
1. Indifference Curve is always downward sloping from left to right. It is because all the points on Indifference Curve provides same level of satisfaction and to keep satisfaction level same, if units of one good is increased then, units of another good must decrease which is only possible in case of downward sloping Indifference Curve.
2. Indifference Curve is always convex to the origin because Marginal Rate of Substitution(MRS) keeps on diminishing which makes Indifference Curve convex to the origin. Otherwise, concave slope indicates increasing Marginal Rate of Substitution and linear straight line indicates constant Marginal Rate of Substitution i.e. against the assumption of Indifference Curve.
3. Two Indifference Curves never intersect each other.
So, consumer must be indifferent between B and C.
But graphically, consumer will prefer B than C as it contain more of quantity of both goods.
So, assumption of transitivity is violated.
4. Higher Indifference Curve, higher the level of satisfaction.
Higher Indifference Curve represent more quantity of one or both goods and consumption of more goods will provide more satisfaction.
It is the graphical representation of various possible combination of two products which a consumer can purchase from his given income and given prices of product. It is also called Consumption Possibility Curve.
Budget Line Equation
PX.X + PY.Y = M
PX – Price of X
X – Quantity of X
PY – Price of Y
Y – Quantity of Y
M – Money Income
Budget Set/Budget Constraint
PX.X + PY.Y ≤ M
Budget set refers to various possible combinations of two goods which a consumer can purchase either by spending entire income or by spending partial income. Thus, it shows all those combinations of two goods lies on the budget line and inside the budget line.
Market Rate of Exchange (MRE)
It is the rate at which consumer has to pay units of good Y to get one more unit of good X.
𝑀𝑅𝐸 = 𝑈𝑛𝑖𝑡𝑠 𝑜𝑓 𝑌 𝑠𝑎𝑐𝑟𝑖𝑓𝑖𝑐𝑒𝑑 / 𝑈𝑛𝑖𝑡𝑠 𝑜𝑓 𝑋 𝑔𝑎𝑖𝑛𝑒𝑑 = Δ𝑌/Δ𝑋 = 𝑃𝑥/𝑃𝑦
It is the slope of budget line.
Since MRE is constant, therefore, it is a straight line.
Impact of Change in Price and Change in Income on Budget Line
Consumer Equilibrium is attained at point ‘E’ where following conditions are met: –
Condition 1:- Budget line is tangent on Indifference Curve.
Slope of IC = Slope of Budget Line
MRS = MRE
𝑀𝑅𝑆 = 𝑃𝑥/𝑃𝑦
Condition 2:- Indifference Curve must be convex to the origin. (Diminishing Marginal Rate of Substitution)
If equality of MRS and MRE is not satisfied, then the following changes may arise: –
a) 𝑀𝑅𝑆 > 𝑃𝑥/𝑃𝑦
It means consumer is willing to pay more units of good Y for one more unit of good X than what market requires to pay. So, consumer will consume more of X and less of Y. So, marginal utility of X decreases, as a result, consumer would like to pay less and less of Y to get one more unit of good X till 𝑀𝑅𝑆 = 𝑃𝑥/𝑃𝑦.
b) 𝑀𝑅𝑆 < 𝑃𝑥/𝑃𝑦
It means consumer is willing to pay less units of good Y for one more unit of good X than what market requires to pay. So, consumer will consume less of X and more of Y. So, marginal utility of X increases, as a result, consumer would like to pay more and more of Y to get one more unit of good X till 𝑀𝑅𝑆 = 𝑃𝑥/𝑃𝑦.
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