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Explain consumers equilibrium with the help of indifference curve approach . Use diagram?
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**Ref:** https://edurev.in/question/634666/Explain-consumers-equilibrium-with-the-help-of-ind

**Consumers Equilibrium through Indifference Curve Approach.**

According to Indifference Curve approach, consumers equilibrium is determined if the following two conditions are satisfied :

(i) MRS_{xy} = P_{x}/P_{y}

(ii) MRS_{xy} is declining.

MRS_{xy} is the rate at which the consumer is willing to sacrifice Y to obtain one more unit of X.

Thus, we can say that ''A consumer is in equilibrium at a point where budget line is tangent to Indifference Curve".

Slope of Indifference Curve = Slope of budget line i.e.

MRS_{xy} =P_{x}/P_{y }

In the diagram, equilibrium is at point E, where the budget line touches the highest attainable indifference curve IC_{2} within consumer's budget.

Bundles on the Indifference Curve IC_{3} are not affordable within budget.

Bundles on the Indifference Curve IC_{1} (i.e. points F and G) are lying on a lower Indifference Curve i.e. will have lower utility levels as compared to the tangency point E. Therefore, the consumer will choose only the tangency point on the budget line.

Therefore, E is a point of consumer's equilibrium where he maximizes his satisfaction. Point E is also called the**"Optimum Consumption Point"** where he consumes OX_{1} of X and OY_{1} of Y.

If MRS_{xy }> MRE it implies that the consumer is willing to sacrifice more unit of Y than what market requires. This induces the consumer to buy more of X. When he buys more of X, utility derived from X falls and he is willing to sacrifice less of Y. Thus MRS_{xy} starts declining. He continues to consume more of X, till MRS_{xy}=MRE=P_{x}/P_{y}.

If MRS_{xy} < MRE, it implies consumer is willing to sacrifice fewer units of Y than what the market requires. He decreases the consumption of X. Due to this MRS_{xy} began to rise, he continues to decrease the consumption of X till MRS_{xy} = MRE.

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