Question

Explain the concept of consumer's equilibrium with a diagram.

Answer 1

The consumer reaches equilibrium at the point where the budget line is tangent on the indifference curve.

T is the point of equilibrium as budget line AB is tangent on indifference curve IC₃ the upper IC which implies maximum possible level of satisfaction. At equilibrium point, the slope of IC refers to MRS_XY and the slope of BL (Budget Line) refers to ratio of price of X to price of Y ie P_x/P_y. Therefore MRS_{x, y} = P_x/P_y.