Indifference Curve Analysis of Consumer's Equilibrium:
The indifference curve indicates the various
combinations of two goods which yield equal satisfaction to the consumer.
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The concept of marginal rate substitution (MRS)
was introduced by Dr. J.R. Hicks and Prof. R.G.D. Allen to take the place of the
concept of Diminishing Marginal Utility.
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An indifference curve shows combination of goods between which a person is
indifferent.
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The understanding of the concept of budget line is
essential for knowing the theory of consumer’s equilibrium.
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The term
consumer’s equilibrium refers to the amount of goods and services which
the consumer may buy in the market given his income and given prices of goods in
the market.
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We now
describe in brief as to how indifference curves and budget lines can be used to
analysis the effects on consumption due to (a) changes in the income of a
consumer (b) changes in the price of a commodity.
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There is difference of opinion among economists
about the superiority of indifference analysis over cardinal utility analysis.
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The concept of consumer’s surplus was introduced by
Alfred Marshall. According to him, a consumer is generally willing to pay more
for a given quantity of good than what he actually pays at the price prevailing
in the market.
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