Write short notes on
Indifference curve
Budget line
Cross price elasticity of demand
Consumer equilibrium
Dynamic equilibrium
Indifference curve:
- An indifference curve represents different combinations of two goods that provide the consumer with the same level of satisfaction or utility.
- It shows the consumer's preference for one combination over another, where the curves farther from the origin represent higher levels of satisfaction.
- The slope of an indifference curve measures the rate at which the consumer is willing to substitute one good for another while keeping the total satisfaction constant.
Budget line:
- A budget line is a graphical representation that shows the different combinations of two goods that a consumer can afford given their income and the prices of the goods.
- It represents the limit of a consumer's purchasing power, as it shows all possible combinations that can be purchased with a given budget.
- Any point on or below the budget line is affordable, while points outside the budget line are unaffordable.
Cross price elasticity of demand:
- The cross price elasticity of demand measures the responsiveness of the quantity demanded of one good to a change in price of another good.
- It indicates if two goods are substitutes or complements.
- If the cross price elasticity is positive, it means the goods are substitutes (if the price of one good increases, the demand for the other good increases) and if it is negative, it means the goods are complements (if the price of one good increases, the demand for the other good decreases).
Consumer equilibrium:
- Consumer equilibrium refers to a situation where a consumer maximizes their satisfaction or utility given their budget constraint and the prices of goods.
- It occurs when the consumer chooses a combination of goods where the indifference curve (representing their preferences) is tangent to the budget line (representing their budget constraint).
- At the point of consumer equilibrium, the marginal rate of substitution (slope of indifference curve) is equal to the price ratio (slope of budget line).
Dynamic equilibrium:
- Dynamic equilibrium refers to a state where there is a balance or stability achieved over time in a dynamic system, such as the market.
- In economics, it often refers to a situation in which demand and supply adjust continually to reach a stable price and quantity.
- The concept recognizes that market conditions are constantly changing, and the equilibrium point is not fixed but evolves as the underlying factors change.