Q.Explain the conditions for consumer equilibrium under the ordinal (indifference curve) approach, with the help of a diagram.

Consumer equilibrium under the ordinal approach is the point where the budget line touches (is tangent to) the highest reachable indifference curve. …

A consumer's indifference map shows preferences, while the budget line shows what is affordable. Superimposing the two, the consumer chooses the combination of X and Y on the budget line that lies on the HIGHEST indifference curve the line can reach.

Any combination on a lower curve such as IC1, which the budget line cuts through at two points, is attainable but sub-optimal, because the consumer could reallocate spending along the budget line to reach a point on a higher curve without spending any extra money. Any combination on a higher curve such as IC3 is preferable but unaffordable, since IC3 lies entirely outside the budget line. The best attainable point, E, is where the budget line is exactly tangent to an indifference curve, IC2 — touching it at a single point without crossing it.

Conditions for equilibrium at point E:

1. Tangency condition: the slope of the indifference curve (the marginal rate of substitution) equals the slope of the budget line (the price ratio): MRSxy = Px/Py. …

Students frequently state only the tangency condition (MRSxy = Px/Py) and forget the second condition — that the indifference curve must be convex at that point — without which a …