CONSUMERS EQUILIBRIUM PRICE INCOME AND

SUBSTITUION EFFECTS.

CONTETNS.

1. INTRUDUCATION
2. CONSUMERS EQUILIBRIUM
3. INCOME EFFECTS
4. PRICEC EFFCETS
5. SUBSTITUTION EFFECTS
6. CONCLUSION
7. REFERNCE

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INTRODUCTION.

In this article we will discuss about the concept of consumer equilibrium.

Explained with the help of suitable diagrams and graphs.

A consumer is said to be in equilibrium when he feels that he connot change

high conditions either by carrying more or by spending more or by changing the
quantities of thing buys a rational consumer will purchase a commodity is equal to
the marginal utility obtained from the thing. if this condition is not fulfilled the
consumer will either purchase more or less if he purchase more MU will go on
falling and a situation will develop where price will paid will exceed MU. In order
to avoid negative utility i, e, dissatisfaction, he will reduce consumption and MU
will go increasing till P=MU.

On the other hand, if MU is greater than the price paid, thy consumer. Will
enjoy surplus satisfaction from the units. He has already consumed, this will
induce him to buy more and more units of the commodity leading to successive fall
in MU till it is equated to its price. Thus by a process of trial and error by buying
more or less units, a consumer will ultimately still at the point where P=MU here,
his total utility is maximum.

CONSUMER EQUILIBRIUM

Given the consumers preference he indifference map. Where in the find storage
of optimization process, i, e, how much of x and y does the consumer buy. the
consumer equilibrium represents the combination of goods purchased that
maximizes utility subject to the budget constraint, to obtain consumer equilibrium
we have to superimpose .

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 The budget line on the consumers indifference map, the indifference map
shows what is desirable. the budget line shows what is feasible. A consumers
equilibrium is a of desirability and feasibility forces that a consumer is faced with
this shown in the point of consumer optimization is attained at E, where
indifference curve Ic2,is just tangent to the price line at the point of tangency the
slope of the budget line(Px/Py).and of the indifference curve (MRSxy=MUx/MUy)
are equal.

Consumer equilibrium diagram

MU/ Px article algebra manipulation shows that this equations.

MUx / Py

Equivalent to the marginal utility per rupees rule for equilibrium.

Thus the first condition denoted graphically by the point tangency of two
curves. This again condition is implied by the convex shape of the indifference
curves the choice.

(Xo and Yo), is an optimal choice for the consumer.

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There are three possibility of a change in the equilibrium position of the consumer.

1. INCOME EFFECT.

There is the possibility of a change in the consumer’s money income. Price

of the goods remaining constant. The effect of a change in the consumers’ income
on his total satisfaction is known as income effect.

“The effect of a change in a consumer’s money income on this total

satisfaction is known as income effect. A consumer will be able to enjoy more or
less satisfaction when his income increases or decreases assuming that the prices of
the goods he purchases remain constant the income effect is. Therefore the effect
on the purchase of the consumer caused by a change in his income. With prices of
goods remaining constant, every increase in his income enable him the of a change
in consumers income is shown with the help of an in difference cure as in this
figure. We have taken grapes on the ox axis and his money income on the oy-axis
(we can also take on other commodity on the oy-axis, representing his money
income)

The consumer has fixed money income OA as shown in the figure, if he

spends the entire money income of an grapes, then given the price of grapes. He
would be buying ob quantity of grapes. Therefore AB represent the price line.

Types of income effect.

1 Positive income effect. With the income –price line AB, the consumer is
assumed to be in equilibrium in the beginning at pointed P on IC1 with on
grapes and ON money to be spent on other goods .to go to higher
indifference curves and therefore he.
2 Zero income effect. the income effect on demand for a commodity is said to
be zero ,when any increases in income does not in any way lead to an
increase in the demand for that commodity
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 3 Negative income effect. The income effect on the demand for a commodity
said to be negative when, with an increases in income, the demand for that
commodity ultimately declines.

The income effect is explained with the help of the following diagram.

Becomes better for then before. On the other hand, every decrease in his
income brings in down on a lower indifference and therefore, he becomes worse of
than before.

The effect of a change in the consumers income is shown with the help of an
indifference curves in fig (1).in this figure, we have taken graphs on the OX axis
and is in money income on the OY axis (we can also taken another commodity on
the OY axis representing his money income.

If he spends the entire money income of OA graph, he would be buying OB

quantity of graph . ICC income consumption curve, therefore, AB represent the
price line. With the income price line AB, the consumer assumed to be in
equilibrium inn the beginning point P on IC1.now his income increased from OA
to OA1 and therefore the price of graphs remaining constant, the new price line
will be A1B1 . the consumer therefore never to a new equilibrium position at point
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E1 on a higher indifference curve 1C2 ,and he will purchase more of graphs I, e,
OM and he will have ON1 and h e will ON to money to be spent on other goods .

Those with vary increase in income the consumer moves in a higher and
higher indifference curves. even though its price remains the same, this is known
as income effect.

2. THE PRICE EFFECT :

The effect of a change in the price of a commodity on its demand called the
price effect.

The price effect occurs when the consumer equilibrium position changes as a
result of a change in the price of a commodity, the money income of the consumer
and the price of all other goods remaining constant, therefore, the consumer
becomes better off or worse off due to a fall or rise in the price of a commodity.

Assumptions.

1 The price of a single commodity changes.

2. The prices of all other goods remain constant.

3. The money income of the consumer remains the same.

4. The tastes and preference of the consumer between a commodity and money or
for any two commodities do not change.

The price effect is explained with the help of the following diagram.

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 As the price X is successively lowered. The budget line shift from AB1 to
AB2 to AB3 respectively given the budget line consumer chooses the combination.

In figure, apples are measured along ox-axis and money income along OY-
axis. Suppose, the consumer has a fixed money income of Rs. A and price of each
apple is 15 paisa in the beginnings therefore. AB is the price line which shows the
possibility of 100grams (OR/or 5apples cob or any combination of apples and he

buys o apple and money suppose. the consumer is in the equilibrium of point E on
IC and he buys ON of apple when the price in 15 paisa per apple.

Price effect is the change in the quantity consumed of goods and services
due to a change in their relative price.

That is shown by the tang envy of an indifference curve and price line. E1 E2
and E3 represent such, equilibrium combination. The curve connecting all the
points of consumer’s equilibrium as price change is called the price consumption.
Curve In the above, figure. The PCC has an upward slop. This indicates him to buy
more of both goods, X and Y, this is known as price effect.

3. SUBSTITUTION EFFECT.

A substitution effect occurs when the relative prices of goods change in such
a way that the consumer concerned is neither better off nor worse off as a result.

There is the possibility of a change in the price of the goods, the consumers’
money income remaining constant, but the price of the goods change in such a way
that a rise in the price of some goods is equally compensated by a fall in the price
of other goods so that the consumer is neither better off nor worse offend he is able

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to retain the same amount of total satisfaction as before, by substituting relatively
cheaper goods for the relatively costlier ones this type of effect is known as
substitution effect.

A substitution effect, across when the relative prices of goods change is such
a way that the consumer, consumer concerned is neither better off nor worse off.
As a result, this happens when a rise in the prices of some goods is neutralized by a
fall in the prices of other goods so that the consumer retains the same amount of
satisfaction as before.

The substitution effect is based on the following assumptions.

1. other commodity dearer.

2. The relative prices have changed making one commodity cheaper and the
Money income of the consumer does not change.
3. The price of one commodity has fallen will the price of another commodity
has risen.

The substitution effect is explained with the help of the following diagram,

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 AB is the original price line point of equilibrium is at point E where the
price line tangent to the indifference curve he buys OM of X and ON of Y suppose
the price of commodity Y increase and the price of commodity X falls relatively
consequently the new price line will be in graphs are measure along OX axis and
oranges along OY axis. AB is the old price line and the consumer is in equilibrium
at E with O, 10 of oranges and OM of apples, suppose the price of oranges is fully
compensated by the cheapness of graphs therefore, there will be no effect on the
consumer’s equilibrium positions. His total satisfaction remains the same as

before. Therefore the, the consumer remains exactly at the same position as
before i, e, on the same indifference curve. But since the consumers substitutes
apple which have now become relatively cheaper for oranges which have no
relatively become costlier. he will move on the same indifference curve and will be
equilibrium at point E1 with 05 of oranges and OB, 10 of apple.

Thus he wills consumer of the cheaper commodity (i, e, apple) and less of the
costlier commodity (i, e, oranges) and get the same total satisfaction as before.
That is why he moves on the same indifference cure from one point to another
point.

CONCLUSION.

First. There is the possibility of a change in the consumers money income,

price of the goods remaining constant. The effect of a change in the consumers
income on his total satisfaction is known as income effect.

Second, there is the possibility of a change in the prices of goods, the

consumer’s money income remaining constant. In such a case. The consumer is

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made either better of if the prices fall or worse of if the prices rise. This type of
effect is known as price effect.

Finally, there is the possibility of a change in the price of the goods the
consumers’ money income remaining constant. But the prices of the goods change
in such a way that a rise in the price of some goods is equally compensated by a
fall in the prices of other goods so that the consumers is neither better off nor
worse off and he ids able to retain the consumer is total satisfaction as before, by
substituting relatively cheaper goods for the relatively costlier ones. This type of
effect is known as substitution effect.

REFERENCE.

1. K.D. Basava.(2006). Micro Economics. Publish by. Vidyavahini prakashan.

Hubli. P.P. 9.15. -9.28.
2. M. John Kennedy. (2010).Micro Economics. Published by. Himalaya
publishing House. Mumbai.
3. Article shared by. Sundaram ponnusamy. (2016). Consumers equilibrium.
https://owlcation, com social-sciencs.

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