question_answer

'During economic depression, consumer's equilibrium shifts leftward'. Explain.

or

Explain the impact of fall in price of good X on consumer's equilibrium, when a consumer consumes only two goods, i.e. X and Y, using indifference curve approach.

 

Answer:

Yes, during economic depression, the income of the consumer falls due to fall in production, demand, etc. Due to this, consumer's budget line shifts leftward and hence, consumer's equilibrium shifts towards the left. Diagram Showing Leftward Shift in Consumer's Equilibrium As it can be seen from the above diagram that, due to depression consumer's budget line shifts to the left to\[{{b}_{1}}{{l}_{1}}\]from \[bl\].As a result, equilibrium point shifts to the left to from\[{{E}_{2}}\]from\[{{E}_{1}}\]. Under Indifference Curve\[(lC)\]approach, when a consumer consumes only two goods X and Y, he is said to he said be in equilibrium when, the following conditions get satisfied: (i) Slope of \[lC\]= Slope of budget line, I.e. Marginal Rate of Substitution (MRS)\[\text{=}\frac{\text{Price}\,\text{of}\,\text{X}\,\text{(}{{\text{P}}_{\text{X}}}\text{)}}{\text{Price}\,\text{of}\,\text{Y}\,\text{(}{{\text{P}}_{\text{Y}}}\text{)}}\] (ii) MRS must be diminishing, i.e.\[lC\] is convex to the point of origin. Now suppose, Price of good X falls, leading to fall in price ratio, hence, budget line will rotate outwards on X-axis and new equilibrium will be attained at a higher Indifference Curve. As shown in the given diagram, AB is budget line and\[l{{C}_{_{1}}}\]is initial Indifference Curve, attaining equilibrium at\[{{E}_{1}}\] with bundles\[({{X}_{1}}{{Y}_{1}})\]Now, as price of good X falls, new budget line is AB' and new equilibrium is attain at point\[{{E}_{2}}\]on higher Indifference Curve, with bundles\[({{X}_{2}}{{Y}_{2}})\].                   Diagram Showing Effect on Consumer?s Equilibrium when Budget Line Shifts