A consumer attains his equilibrium when he maximizes his total utility, given his income and prices of goods and services he consumes remains constant. According to ordinal utility approach, two conditions must be satisfied for the consumer to be in equilibrium.
These are:
(i) The consumer will be in equilibrium at the point where price line is tangent to indifference curve. It is the point of maximum satisfaction.
(ii) The consumer is in equilibrium where price ratios are equal to marginal rate of substitution.
This is an essential condition of consumer’s equilibrium.
(iii) The third essential condition of consumer’s equilibrium is that at point of equilibrium, MRSxy should be declining. It simply means that indifference curve is convex to the origin.
Diagrammatic Representation of Consumer’s Equilibrium : To find out consumer’s equilibrium, a graph of indifference curve is drawn along with budget line. The indifference curve which is close to origin represents lesser satisfaction and the farther indifference curve represents higher satisfaction. Given the budget line, the consumer tries to attain highest indifference curve.
In figure, PT is budget line and IC1, IC2 and IC3 are three indifference curves. Given the budget line, the consumer may get maximujn satisfaction by IC2. This is consumers’ point C, budget line AB is tangent to indifference curve IC2. This is consumers’ equilibrium point. At this point, consumer purchases OH amount of X and OE amount of Y.
Conclusion : Cardinal approach is based on various unrealistic assumptions, therefore ordinal approach is superior to cardinal approach.
