DEPARTMENT OF TECHNICAL EDUCATION

ANDHRA PRADESH
Name : H. Srividya
Designation : SL / CCP
Institute : GPW, Palamaner, Chitoor dist
Branch : Commercial and Comp. practice
Semester : V Semester
Subject : Business Economics
Sub-Code : CCP-502
Topic : Consumer Surplus
Duration : 50 minutes
Sub Topic : Indifferent curves Analysis
Teaching Aids : PPT, animation

CCP502.29 1
Objectives

On completion of this period, you would be

able to:
 Explain how a consumer attains equilibrium using
Indifference Curve Analysis

CCP502.29 2
Recap

In the previous class, we have discussed

About:
 What is Marginal Rate of Substitution (MRS)?
 What is a price line?

CCP502.29 3
Consumer’s Equilibrium

Equilibrium:
 A point of maximum satisfaction

A consumer attains the equilibrium:

 When he gets maximum satisfaction
 With his limited income
 Spending on different commodities
 At given market prices

CCP502.29 4
 Contd..
Consumer’s Equilibrium

 In Indifference Curve Analysis

 Using Indifference Map and Price line

CCP502.29 5
Indifference Map
As we have already discussed-
Indifference Map shows:
 Various Indifference Curves
 giving possible combinations of two goods
 At different levels of satisfaction

CCP502.29 6
Price line

Price line shows:

 Various combinations available
 With the given income of the consumer
 At the given market prices

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Equilibrium using
Indifference Analysis
Y
P
 IC1 to IC5 Indifference A
curves of various

Commodity - y
levels of satisfaction
IC1
 IC1 – Higher level E
N
 IC5 – Lower level IC2
 PL – Price Line IC3
B IC4
IC5
X
O M L
Commodity - x
CCP502.29
Fig:1 8
Equilibrium using
Indifference Analysis
 Every combination of Price Line (PL) costs the
same amount on money

 Consumer always tries to reach the higher

indifference curves

CCP502.29 9
Equilibrium using
Indifference Analysis
Y
P
 The Price line touches
A
the Indifference
curves at A,B and E

Commodity - y
IC1
 Points A and B lies on
N E
IC4 IC2
 Point E lies on IC3, IC3
which a higher B IC4
indifference curve
IC5
X
O M L
Commodity - x
CCP502.29
Fig:2 10
Equilibrium using
Indifference Analysis
Y
 The consumer will be P
in equilibrium at the A
point where it is a

Commodity - y
tangent to the price IC1
line N E
IC2
 At the point E, the IC3
B
consumer will be in IC4
equilibrium state. IC5
X
O M L
Commodity - x
CCP502.29
Fig:3 11
Assumptions
 The scale of preferences of the consumer
should remain the same throughout the
analysis
 He has given amount of money to spend
 He has full awareness of market prices
 All goods are homogeneous and divisible
 He is a rational consumer

CCP502.29 12
Summary

In this period, we have discussed -

 Consumer’s equilibrium through indifference
curve analysis
 Assumptions thereon

CCP502.29 13
Quiz:
1. A consumer always wish to reach the____.

a) Lower Indifference curve

b) Higher Indifference curve
c) Does not wish to change the indifference curve

CCP502.29 14
Frequently Asked Questions

1. Explain the consumer’s equilibrium through

Indifference Curve Analysis
2. Mention the assumptions for the consumer’s
equilibrium in Ordinal Approach

CCP502.29 15