Economics is an exact science. Therefore, many parameters studied in the process of mastering the subject are most easily perceived in the form of graphs and illustrations. One of these graphic parameters is the indifference curve and its main points characterizing consumer behavior. The features of this functionality are most conveniently demonstrated graphically.
How consumer behavior is determined
To find out what consumer equilibrium is on the map of indifference, this definition should be disassembled for each word.
Any marketer will confidently name three main factors characterizing the behavior of a potential buyer. This is the usefulness of the purchase, its value and income of the buyer. Since the consumer and his purchase are the most important priorities for any distribution network, we consider these factors in more detail.
Utility - a factor determining 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 all selected products;
- marginal utility - lists the useful qualities of each unit of goods.
Both parameters lay the foundation for understanding what constitutes consumer equilibrium on the map of indifference. This value is determined from the fact that total and marginal utility are interconnected inversely with each other. An increase in the consumption of one product increases its overall 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 are planning to buy it, and for this you are evaluating every interesting offer. For you, it has the maximum marginal utility - it is so desirable for you, and the minimum total. But as soon as you bought a car, the need for the next drops sharply. Thus, the marginal utility of the machine as a unit of goods for you falls, and the total increases.
Consumer preferences
Based on the definition of utility, we must determine what we mean by this term. There are several criteria for determining this concept. One of them is ordinal, evaluates sets of various commodity characteristics from the point of view of the consumer. To apply this method, two sets are taken that are equally useful to the buyer. All sets of equal utility are graphically displayed using an indifference curve. The curve got this name because, given the specified characteristics and cost, these products will be equally attractive to the buyer and, in the end, he does not care what the final choice will be. It is impossible to choose an equilibrium point for a single product - the more products are involved in the sample, the more accurate the indifference curves will be.
Charts and functions
Visually, the indifference curve on the chart is displayed like this:
Smooth curves located to the right of the ordinate 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 greater the likelihood that the buyer will prefer this particular set of advantages;
- all indifference curves are characterized by a negative bias. 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 map of indifference.
What is consumer balance?
The definition of equilibrium is directly related to the material capabilities of a potential buyer. Unfortunately, for each buyer, the boundaries of what is desired are in the area of budgetary constraints.
If the consumer has a total income of D units, by which he can pay for the characteristics of goods A and B, the cost of which is equal to St and St , then the budget constraint can be calculated by the formula:
D = St a × A + St in × B;
The budget line on the card of indifference determines the combination of all the characteristics of the goods available to the consumer at a given cost and level of income. The growth of customer income shifts the budget line to the right - more goods become more accessible. The drop in revenue moves the budget line to the left on the chart. The intersection of the budget line and the indifference curve will give a new value, which is called the optimum of the consumer. Optimum is directly related to consumer equilibrium on the map of indifference. 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 map of indifference is the place where the “indifferent” curve comes into contact with direct budgetary opportunities. All the curves, which are located on the chart above and to the right of the point of indifference, will not interest the buyer due to the fact that the possibility of acquiring these goods is limited by the available income. Thus, a simple definition can be deduced: the consumer balance on the card of indifference is the optimal ratio of the characteristics of the product to its price, at which the potential consumer will definitely make a purchase.
What can an analysis of consumer balance show?
This information is directly related to how consumer balance is determined on the indifference map. This is one of the most important points of the chart, designed for a detailed analysis of current sales. The marketer, who forms the cost of goods for the end consumer, must correctly determine where the consumer balance is on the map of indifference. This value serves as an excellent guide for the possible price range of a product or service.
Consumer balance on the card of indifference is the ability to correctly determine the likely volumes of sales and calculate the necessary inventory, provided that the supply of this product is discrete. Thus, from an abstract scientific concept, the point of consumer equilibrium becomes an effective tool with which you can calculate customer behavior and increase sales.