A consumer obtains the state of equilibrium when he becomes successful in maximizing his satisfaction by purchasing goods with his limited income and given prices of good. The price line of consumer is determined by his income and prices of the goods he consumes with this given price line, a consumer tries to obtain the maximum possible indifference curve.
In indifference curve analysis, there are two conditions of consumer’* equilibrium.
1) Price line should be trangent to indifference curve i.e. at the point of equilibrium, the marginal rate of substitution X and Y (MRSxy) should be equal to the ratio of prices of goods X and goods Y.
In fig. at equilibrium point E, Slope of price line = Slope of Indifference Curve or
Px/Py = MRSxy
2) For stable equilibrium, indifference curve should be convex to the origin at the point of equilibrium. i.e MRSxy should be diminishing at the point of equilibrium.
In fig. at point K, first condition is getting fulfilled but this equilibrium is not stable because at point K the MRSxy is increasing. In fig. point E is a point of final equilibrium where MRSxy is diminishing.
