Class 12 Consumer’s equilibrium

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What do we mean by Consumer's Equilibrium? This presentation explains all.

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Class 12 Consumer’s equilibrium

  1. 1. Consumer’s equilibrium
  2. 2. What is Utility and its concepts? • Satisfying power of a commodity Total utility • Sum total of utilities derived from consumption of all units Marginal utility • change in utility • Additional utility derived after consuming one additional unit • Mathematically expressed as 𝐌𝐔 = 𝐓𝐔 𝐧 − 𝐓𝐔 𝐧−𝟏
  3. 3. What is the relationship between total utility and marginal utility? 1. TU increases at increasing rate, MU increases. 2. TU increases at decreasing rate, MU decreases 3. TU reaches maximum, MU is zero 4. TU decreases, MU negative 2 4 6 8 -5 0 5 10 15 20 25 Total Utility Marginal Utility Quantity TU,MU
  4. 4. What is the law of diminishing marginal utility? • Also known as “fundamental law of satisfaction” ; “fundamental psychological law”. • States that “as more and more standard units of a commodity are continuously consumed, MU derived from every additional unit must decline.”
  5. 5. How consumer equilibrium can be attained in a single commodity case? Purchase of a commodity depends on: 1. Price of the commodity 2. Marginal (and total utility) of the commodity 3. Marginal utility of money (assumed to be constant) Equilibrium at the point where 𝐌𝐔 𝐦 = 𝐌𝐔 𝐱 𝐏 𝐗 2 4 6 8 -10 0 10 20 30 40 MUX MUM Quantity MUX,MUM
  6. 6. However, in a two commodity case…. • Equilibrium will be reached at 𝐌𝐔 𝟏 𝐏𝟏 = 𝐌𝐔 𝟐 𝐏𝟐 = ⋯ = 𝐌𝐔 𝐧 𝐏 𝐧 = 𝐌𝐔 𝐦 • The marginal utility derived from last rupee spent should be equal to the amount spent on other commodities
  7. 7. Consumer equilibrium using Indifference curve approach can be calculated as… • Indifference curve analysis uses ordinal approach • Indifference curve shows different combinations of two commodities between which a consumer is indifferent. • Slope: marginal rate of substitution which is decreasing from left to right 0 1 2 3 4 5 0 5 10 15 Good A GoodB
  8. 8. What are the properties of indifference curve? 1. IC are convex to the origin, so that MRS tends to diminish. 2. IC are negatively sloped, or they slope downward. 3. IC never touch/intersect each other.
  9. 9. On the other hand, budget line • Budget line shows different possible combinations of good 1and good 2, which a consumer can buy, given his budget and the prices of good 1 and good 2. • Consumer spends all his income on any point on the budget line • Mathematically, Px. X + Py . Y = M 0 10 20 30 40 0 20 40 60 80 Good A GoodB
  10. 10. When can budget line rotate? • Decrease/ increase in price of good A. • Decrease/ increase in price of good 2. 0 10 20 30 40 0 20 40 60 80 Good A GoodB 0 10 20 30 40 0 20 40 60 80 Good A GoodB
  11. 11. Consumer’s equilibrium • At the point where indifference curve and budget line are tangent to each other. • Mathematically, 𝐌𝐑𝐒 𝐗𝐘 = − 𝐌𝐔 𝐗 𝐌𝐔 𝐘 0 10 20 30 40 0 20 40 60 80 Good A GoodB
  12. 12. Questions? Contact us Website: www.economicsharbour.com Email: admin@economicsharbour.com
  13. 13. Thank you

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