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A consumer consume two goods as in an equilibrium, using indifference curve analysis explain the reaction of consumer if- Price of commodity X rises?
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A consumer consume two goods as in an equilibrium, using indifference ...
Indifference Curve Analysis: Reaction of Consumer if Price of Commodity X Rises
Introduction
Indifference curve analysis is a graphical representation of consumer behavior in economics. It shows how consumers allocate their income between two or more goods to achieve a particular level of satisfaction.
Equilibrium
In equilibrium, a consumer is maximizing their utility by consuming a combination of two goods that lie on the highest attainable indifference curve.
Price of Commodity X Rises
If the price of commodity X rises while the price of commodity Y and income remain constant, the consumer will react in the following ways:
- Substitution Effect: The substitution effect suggests that the consumer will substitute commodity Y for commodity X because commodity X has become relatively more expensive. The consumer will move to a lower indifference curve that is tangent to the new budget constraint.
- Income Effect: The income effect suggests that the consumer's real income has decreased due to the rise in the price of commodity X. This will cause the consumer to reduce the consumption of both commodities X and Y. The consumer will move to a lower indifference curve that is parallel to the original indifference curve.
- Total Effect: The total effect is the combination of the substitution and income effects. It suggests that the consumer will reduce the consumption of commodity X and increase the consumption of commodity Y. The consumer will move to a new equilibrium point that is on a lower indifference curve and to the left of the original equilibrium point.
Conclusion
In conclusion, the reaction of a consumer to the rise in the price of commodity X can be explained using indifference curve analysis. The consumer will substitute commodity Y for commodity X due to the substitution effect, and reduce the consumption of both commodities due to the income effect. This will result in the consumer moving to a new equilibrium point that is on a lower indifference curve and to the left of the original equilibrium point.
Community Answer
A consumer consume two goods as in an equilibrium, using indifference ...
Let's assume that he consumes two goods A and B and is indifferent to the pair. So when the price of X commodity rises, the consumer will try to reduce the consumption of X and will prefer to buy more of Y in the place of X to maintain the same level of satisfaction from the consumption as earlier . If it is to be represented on a graph assuming X commodity on X-axis and Y on Y-axis , the point on the graph ( before change in price ) will move upward on the same Indifference curve showing a reduction in the purchase quantity of X and an increase in the purchase quantity of Y ( both effected with a magnitude that the ultimate outcome remains constant ) .
Example :
Before change in price
X=4 and Y=4 . Satisfaction = 4×4 = 16
After change in price
X=2 and Y=8 . Satisfaction =2×8= 16
Example :
Before change in price
X=4 and Y=4 . Satisfaction = 4×4 = 16
After change in price
X=2 and Y=8 . Satisfaction =2×8= 16
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A consumer consume two goods as in an equilibrium, using indifference curve analysis explain the reaction of consumer if- Price of commodity X rises?
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A consumer consume two goods as in an equilibrium, using indifference curve analysis explain the reaction of consumer if- Price of commodity X rises? for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about A consumer consume two goods as in an equilibrium, using indifference curve analysis explain the reaction of consumer if- Price of commodity X rises? covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for A consumer consume two goods as in an equilibrium, using indifference curve analysis explain the reaction of consumer if- Price of commodity X rises?.
A consumer consume two goods as in an equilibrium, using indifference curve analysis explain the reaction of consumer if- Price of commodity X rises? for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about A consumer consume two goods as in an equilibrium, using indifference curve analysis explain the reaction of consumer if- Price of commodity X rises? covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for A consumer consume two goods as in an equilibrium, using indifference curve analysis explain the reaction of consumer if- Price of commodity X rises?.
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