Explain the conditions of consumer’s equilibrium under indifference curve approach.

According to indifference curve approach, consumer’s equilibrium is the point at which the slope of indifference curve is equal to the slope of budget line.

The conditions of the consumer’s equilibrium are:

(i) MRSxy = P x/ P y

Where

MRSxy = Marginal Rate of Substitution of Commodity X and Commodity Y

Px = Price of Commodity X

Py = Price of Commodity Y,

(ii) At the point of equilibrium, indifference curve must be convex to the origin. It means that MRSxy declines when X is consumed more.

Explanation - Suppose MRSxy > P x/ P y. This means that the consumer is willing to pay more for X than market price of X. This will induce the consumer to buy more of X which will reduce MRSxy. This process will continue till MRSxy = P x/ P y