This document provides an overview of consumer equilibrium using both the utility and indifference curve approaches. It defines key concepts like total utility, marginal utility, indifference curves, and budget lines. It explains that in the utility approach, consumer equilibrium occurs when the marginal utility per rupee is equal for all goods. In the indifference curve approach, equilibrium is reached at the point where the budget line is tangent to the highest attainable indifference curve, meaning the slope of the indifference curve equals the slope of the budget line. The document also discusses how changes in prices and income affect the budget line and consumer equilibrium.

1. CONSUMER’S
EQUILIBRIUM
PART 1
SUDHANSHU PANDEY
SUDHANSHU PANDEY

2. CONSUMER
A Consumer is one who consume goods and services for satisfaction of his
Wants.
Consumer is the seeker of Satisfaction.

3. (TU) → Total Utility: It is the sum total of utility derived from
consumption of all units of a commodity.
(MU) → Marginal Utility: It is the change in TU due to consume of an
additional units.
Utility is the wants satisfying capacity of a commodity.
CARDINAL APPROACH

4. Law of Diminishing Marginal Utility
As we consume more and more units of a commodity then the marginal
utility derives from each an additional unit goes on diminishing.
Marginal utility always falls, zero and negative.
Assumptions
(i)
(ii)
(iii)
Consumer is rational.
Applicable in Cardinal approach
Only standard units of the commodity are consumed like cup of tea, not a
spoon of tea.
(iv) Continuous consumption of Homogeneous commodity, not that one unit of
the commodity is consumed now an another on tomorrow.

5. Quantity TU MU
0 0 -
1 8 8
2 14 6
3 18 4
4 20 2
5 20 0
6 18 -2

6. Relationship between TU & MU
1) As TU increases Mu is positive
2) As TU falls MU is negative
3) As TU is maximum (Saturation point)
MU is zero
(point of Satiety)

7. Consumer Equilibrium

8. Consumer Equilibrium in Case of Utility Approach
(a) In case of single commodity: In this case consumer Consumes only one
commodity
Equilibrium is the point where the consumer is getting the maximum
satisfaction with his given income.
In this case consumer is equilibrium at a point where the marginal utility of X
commodity is equal to price of X commodity

9. No. of units MUx Px
1 10 6
2 8 6
3 6 6
4 4 6
Schedule and Diagram

10. (b) In Case of Double Commodity: In this case consumer consumes two
commodity X and Y.
In case of any one commodity, say X a consumer is in equilibrium when (1)
Similarly in case of commodity Y consumer is in equilibrium when (2)

11. So relating equation (1) and (2)
We consider a situation when a consumer, both commodities X and Y, we
can say
Here marginal utility per rupee must be the same for both. Consumer is in
equilibrium when ratio of their marginal utilities is equal to the ratio of their prices.

12. Units Mux MUy
1 7 8
2 5 6
3 4 4
4 2 3
5 1 2
Schedule and Diagram

13. What happens when

14. What happens when

16. Q2.

17. Thank you
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18. CONSUMER’S
EQUILIBRIUM
PART 2
SUDHANSHU PANDEY
SUDHANSHU PANDEY

19. Indifference Curve Analysis (Ordinal Approach)
Indifference curve refers to the various combination of two commodities
which gives the same level of satisfaction to consumer.
Assumptions
(i) Consumer is rational.
(ii) Consumer forms the combination of two commodities.
(iii) Based on Ordinal Approach.
(iv) Income of Consumer is constant.

20. Combination Comm. X Comm. Y MRS
I 1 units 15 units -
II 2 11 4y : 1x
III 3 8 3y : 1x
IV 4 6 2y : 1x
V 5 5 1y : 1x
Schedule & Diagram

21. Marginal Rate of Substitution (MRS)
It refers to the loss in satisfaction due to reduction in one commodity which
is compensated by the unit gain in another commodity

22. (i) Slopes downward to right or
convex to origin:
As a result of an additional unit of
good X. Some amount of good Y
has to be foregone to get same
level of satisfaction due to this
IC is convex to origin
MRS is the slope of IC.
Features & Characteristics of Indifference curve

23. ii) All the combinations on a IC gives
equal level of satisfaction:-
In an indifference curve, all the
points on a IC curve gives same level
of satisfaction.
Combination I = II = III = IV

24. iii) IC on Right Side represents higher
level of Satisfaction and Vice versa.
In this given diagram IC2 is right side on
the graph. Hence IC2 gives higher
satisfaction than IC1.
— In IC1 consumer get the bundle (1,
1) it means one unit of x and one unit of
y but in IC2 consumer get the bundle (2,
1) here 2 unit of x and one unit of y. So
IC2 gives more satisfaction as compared
to IC1.

25. (iv) Two Indifference Curve Can never intersect each other:
Each indifference curve represents a different level of satisfaction.
So their intersection is not possible.
Prove Reverse:
in IC1 [Point C = D]
in IC2 [Point A = B]
Property (iii)→ Right the IC gives higher satisfaction.
So in IC1 → Point A is left side but point B is right side
Hence,
Point B gives higher satisfaction than point A but we prove in eq. (1) A = B hence it is
not possible that Two Indifference Curve can intersect each other

26. (v) There can be infinite number of
indifference curve:
For a consumer there can be infinite
number of indifference curve. This is
also called family of indifference
curve or called Indifference Map

27. Budget line:- It is a line showing different combination of two goods which a
consumer can purchase with his given income and price of goods.
Budget line is also called price line.
Equation of budget line Y = x · Px + y · P y
— Px refers to price of x commodity.
— Py refers to price of y commodity
— x shows no. of x commodity.
— y shows no. of y commodity.
— Y shows income of a consumer.

28. Budget set: It refers to a set of attainable combination of two goods at given
market price and income of consumer.
e.g. Income of a consumer is ` 60. And he want to spent it on two goods say
(x and y). Assume price of x is ` 2 per unit and y is ` 1 per unit.
Budget set are
(0, 60), (10, 40), (20, 20), (30, 0), (15, 30), (25, 10), etc.
(Attainable combination)

29. Attainable or feasible combinations
are those combinations of two
goods which can be purchased by
the consumer with his given income
and given market price.
As shown figure (1).
Unattainable or Non feasible
combinations are those which can
not be purchased with his given
income and given market price.
e.g. (20, 30) (15, 40) etc.

30. Effect on Budget line when income of a consumer changes.
ROTATION AND SHIFT IN A BUDGET LINE

31. Effect on Budget line when price of commodity changes

33. Monotonic preference
A rational consumer would be like to have more of one good without less of
the other. e.g. out of bundles (2, 2) out of (3, 2) a rational consumer prefer
bundle (3, 2).

34. Consumer equilibrium in case of IC Approach
In case of indifference approach. Consumer is in equilibrium where the
budget line makes tangent on indifference curve. or
at that point where the slope of IC curve is equal to slope of budget line.

35. Here MRS continue falls
In the above diagram "e" is the equilibrium point where
(i) Budget line tangent on IC2. and
(ii) Slope of IC is equal to slope of budget line.

36. Thank you
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