Economics is an exact science. Therefore, many of the parameters studied in the process of mastering the subject are easiest to perceive in the form of graphs and illustrations. One of these graphical parameters is the indifference curve and its main points that characterize consumer behavior. The features of this functionality are most conveniently demonstrated graphically.
How consumer behavior is defined
To find out what consumer equilibrium is on the indifference map, this definition should be parsed word by word.
Any marketer will confidently name three main factors that characterize the behavior of a potential buyer. This is the utility of the purchase, its cost and the income of the buyer himself. Since the consumer and his purchase are the most important priorities for any retail chain, we will consider these factors in more detail.
Utility is a factor that determines the ability of a product or service to satisfy a human need. This parameter can be divided into two components:
- general utility - it measures the totality of the useful qualities of allselected items;
- marginal utility - lists the useful qualities of each unit of goods.
Both parameters lay the foundation for understanding what consumer equilibrium is on the indifference map. This value is determined from the fact that total and marginal utility are inversely related to each other. An increase in the consumption of one good increases its total utility, but at the same time its marginal utility decreases.
This law is well known to economists and marketers. In textbooks, it is called the law of diminishing utility.
Simple examples
What does it look like in practice? Very simple. Let's say you don't have a toy car. You plan to buy it, and for this you evaluate each interesting offer. For you, it has the maximum marginal utility - so much you want it, and the minimum total. But once you have bought a machine, the need for the next drops sharply. Thus, the marginal utility of the car as a unit of goods for you falls, and the total utility increases.
Consumer preference
Starting from the definition of utility, we must define what we mean by this term. There are several criteria for defining this concept. One of them - ordinal, evaluates sets of various product characteristics from the point of view of the consumer. To apply thismethod, two sets are taken that are equally useful to the buyer. All bundles with the same utility are graphically displayed using an indifference curve. The curve got its name because, given the characteristics and cost, these goods will be equally attractive to the buyer and, in the end, he does not care what the final choice will be. For a single product, it is impossible to choose an equilibrium point - the more products are included in the sample, the more accurate the indifference curve data will be.
Charts and functions
Visually, the indifference curve on the chart is displayed as follows:
Smooth curves, located to the right of the y-axis, show the preferences of potential customers when buying a particular product. These curves have certain properties, namely:
- the higher and to the right the curve is, the more likely it is that the buyer will prefer this particular set of benefits;
- all indifference curves have a negative slope. If any advantage ceases to be such, in the eyes of the buyer, other sets of goods also change their properties;
- curves never intersect.
The set of curves defines the indifference map.
What is consumer equilibrium
Determining the balance is directly related to the material capabilities of a potential buyer. Unfortunately, for every buyer, the boundaries of what they want are in the area of budget constraints.
If a consumer has a total income of D units with which he can pay for the characteristics of goods A and B, the cost of which is Ca and Ccthen the budget constraint can be calculated using the formula:
D=Sta × A + Stv × B;
The budget line on the indifference map determines the combinations of all product characteristics available to the consumer at a given cost and income level. An increase in the buyer's income shifts the budget line to the right - more goods become more available. A fall in income moves the budget line to the left on the graph. The intersection of the budget line and the indifference curve will give a new value, which is called the consumer's optimum. The optimum is directly related to consumer equilibrium on the indifference map. What is this value, and how can it be applied in practice?
As the name implies, the point of indifference characterizes the personal, subjective opinion of the buyer about the benefits of this product, along with the willingness to buy it. Consumer equilibrium on the indifference map is the place where the "indifferent" curve touches the line of budgetary possibilities. All curves that are located on the graph above and to the right of the indifference point will not be of interest to the buyer due to the fact that the possibility of acquiring these goods is limited by available income. Thus, we can derive a simple definition: the consumer equilibrium on the indifference map is the optimal ratio of the characteristics of the product and its price, in which the potential consumer mustwill make a purchase.
What can consumer equilibrium analysis show?
This information is directly related to how consumer equilibrium is determined on the indifference map. This is one of the main points of the chart, designed for a detailed analysis of current sales. A marketer who forms the cost of a product for the final consumer must correctly determine where the consumer equilibrium lies on the indifference map. This value serves as an excellent guide for the possible price range of a product or service.
Consumer equilibrium on the indifference map is the ability to correctly determine the likely sales volumes and calculate the required inventory, provided that the supply of this product will be discrete. Thus, from an abstract scientific concept, the point of consumer equilibrium becomes an effective tool with which you can calculate the behavior of the buyer and increase sales.
