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Consumer’s Equilibrium & Indifference Curve Analysis || Application in leofinancing

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Tariqul Islam
@tariqul.bibm
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Consumer’s Equilibrium:

Consumer’s equilibrium refers to a situation in which a consumer with his certain income and certain prices of the product, purchases such a combination of goods and services as gives him maximum satisfaction and he is not willing to make any change in it.

As a trader of cryptocurrency, you have to find out your best combination of cryptocurrencies to purchase at the changed rate synchronising with your investment.

The assumptions of consumers equilibrium and reality

There are some assumptions of Consumer’s equilibrium theoretically, due to change in any of these issues, the theories may not fit with our real life.

The assumptions of consumers equilibrium are as follows:

  • Consumer is rational & always try to maximizes his satisfaction from the purchase of goods. But in real life, we find that most of the traders are not rational rather than they are very much emotional. They are driven by their emotions and it has a direct impact on their financial decisions.

  • Consumer’s income is constant. This theory also not work in real life as the income fluctuations is occurring. And if not do so, but the investment may changes.

  • Prices of the goods are constant. This is totally impossible in our daily life. Goods price are changed over time. Whennever we are talking about cryptocurrencies, it is totally vulnerable about the stability of price.

  • Consumer knows the price of all things. It's true, as consumer trader can monitor with the ask and bid price of any cryptocurrency as they. But the matter is that- they are not willing to monitor the price all-time and sometimes they forget about it.

  • Consumer can spend his income in small quantities. It is perfectly applicable in case of cryptocurrencies.

  • Goods are divisible. It is also perfectly applicable in case of cryptocurrency trading.

  • There is perfect competitions in the market. There are competitions, but we cannot term it as a perfect competition. Because in case of perfect condition, there should have a lot of buyer and seller all time in the market.

  • Consumer is fully aware of the indifference map. It is not happened all time, as there are a lot traders who are not willing about the academic issues rather than experiences, expectations and market trends.

Conditions of Consumer’s Equilibrium:

There are two main conditions of consumer’s
equilibrium-

1. Price line should be tangent to indifference curve:

In this diagram, AE is the price line and IC1, IC2 & IC3 are indifference curves. A consumer can buy those combinations which are not only on price line AE but also coincide with the highest indifference curve which is IC2 in this case.

Consumer will be in equilibrium at combination C (2 btc + 4 ethereum) because at this point price line AE is tangent to the indifference curve IC2. At equilibrium point C, slope of the indifference curve and the price line coincide.

In case of equilibrium: Slope of indifference curve = slope of price line

2. Indifference Curve must be convex to the origin:

It means that marginal rate of substitution of first good x (btc) for second good y (ethereum) should be diminishing. .

If at the point of equilibrium,indifference curve is concave and not convex to the origin, it will not be a position of permanent equilibrium.

You may read about IC and Price line/Budget line from my following previous posts, where I discussed about the theoretical issues relating with practical application of that theories in real life specially in case of cryptocurrency trading.

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