The differences in shapes of indifference curves of the individuals causing difference in their marginal rates of substitution of one good for another at any given market basket of goods furnish us with the information about their preferences and tastes for goods.
In panel (a) of Figure 8.21 the indifference curves depicting preferences and tastes of Amit and in panel (b) the indifference curves depicting preferences of Rajiv between wine and soft drinks have been drawn.
As will be seen, whereas indifference curves of Amit between wine and soft drinks are relatively flat which implies that his marginal rate of substitution between the two goods (MRSws), at any given market basket, say M, of the goods is low, the indifference curves of Rajiv are steeper and his marginal rate of substitution (MRSws) at the same market basket M is high showing that he strongly prefers wine to soft drink. Suppose both the individuals face the same prices of these goods and the same income to spend on them which mean that they have the same budget line BL.
It will seen from Figure 8.21 that at a given market basket M both the individuals are not in equilibrium. This is so because whereas at Min the panel (a) Amit’s marginal rate of substitution of wine for soft drink (MRSws) is lower than the given price ratio (Pw/Ps) of the two goods, in panel (b) marginal rate of substitution of wine for soft drinks (MRSws) of Rajiv is greater than the given price ratio (Pw/Ps).
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Now, it is important to understand how the differences in preferences and tastes of the individuals’ between the goods would affect their equilibrium or choice of the two goods. In the analysis of consumer’s equilibrium, as we have seen above, a consumer is in equilibrium and chooses a basket of goods where his indifference curve is tangent to the given budget line.
A glance at Figure 8.21 will reveal that, with the budget line BL, since Amit strongly prefers soft drinks to wine, he is in equilibrium at point E where he chooses relatively a large quantity OS of soft drinks and relatively a small quantity of wine OW whereas Rajiv who prefers wine to soft drinks is in equilibrium at B in panel (b) where he chooses a relatively large quantity OW- of wine and a smaller quantity OS’ of soft drink.
Thus the choices of basket of goods by the two individuals are determined by their respective preferences between the two goods. It is worth noting that the MRSws of both the individuals in their equilibrium position is the same, though their preferences between the two goods differ. This is so because to maximise satisfaction each of them equates his MRSws with the given price rates (Pw/Ps) of the two goods which has been assumed to be the same for the two individuals. Thus, it follows from above that whereas differences in preferences of the individuals cause differences in MRSws of the individuals at any given market basket of goods and result in choice of different market baskets of goods in their equilibrium position, MRSws of the two individuals at these different baskets of goods in their equilibrium solution is the same.