Answer to Question #299058 in Microeconomics for Pooja

Question

Explain consumer’s equilibrium condition with help of indifference curve approach. How will 

a change in consumer’s income affect his equilibrium?

Answer 1

Indifference Curve Equilibrium Approach

Under this approach, the consumer equilibrium is achieved at the point where maximum satisfaction is achieved, subject to price and income. Equilibrium point will be derived from the indifference map and the budget line. The indifference will show all possible consumption points of the consumer. The highest indifference curve on the map shows highest utility, while the lowest shows the least possible derivable utility. However, there exists a budget line, which constraints the consumer. Therefore, consumption choice to be made is to maximize utility, subject to the budget line. Equilibrium being achieved at the point where, the budget line, is tangent to indifference curve used.

When income of the consumer changes, the budget line shifts either to the left with reduced income, or to the right with increase in income. Line AB represents the consumer budget line. The consumer consumes at the indifference curve IC1, which is tangent to the budget line.

Reference.

Geerling, W., Nagy, K., Rhee, E., & Wooten, J. (2021). Using K-pop to teach indifference curve analysis, behavioral economics and game theory. Behavioral Economics and Game Theory (November 17, 2021). SSRN: https://ssrn.com/abstract=3965928 or http://dx.doi.org/10.2139/ssrn.3965928