This document discusses concepts related to consumer equilibrium and demand. It defines key terms like utility, marginal utility, total utility, and how they are related. The law of diminishing marginal utility and how it impacts demand is explained. Two approaches to modeling consumer equilibrium are presented: the utility approach and indifference curve approach. Consumer equilibrium conditions and assumptions are outlined for both single and multiple goods. Factors that determine demand, the law of demand, and exceptions are also summarized. Elasticity of demand and its measurement are briefly introduced.

1. Consumer
equilibrium and
Demand
S.MADAN KUMAR M.A.,B.Ed.,M.Phil.,M.B.A.,

2. • Utility is the power or capacity of a commodity to satisfy
human wants .
• Utility is subjective and cannot be measured
quantitatively ,yet for convenience sake,it is measured in
units of pleasure or utility called utils
Utility

3. • Marginal utility is the additional utility derived from
consumption of an additional unit of a commodity
• MUn=TUn-TUn-1
Marginal utility

4. • Total utility is the sum of all the utilities derived from
consumption of an additional unit of a commodity.
• Relationship between Marginal and Total utility
1.TU increases so long as MU is more than zero
2.TU is maximum when MU is zero
3.TU starts declining when MU becomes negative.
Total utility

5. Units of oranges
consumed
Marginal utility
(utils)
T0otal
utility
(utils)
0
-
0
1
10
10
2
8
18
3
5
23
4
2
25
5
6
7
1
0
-3
26
26
23
Relation between MU and TU

6. • As more and more units of a commodity are consumed
,marginal utility derived from each successive unit goes
on falling
Law of diminishing
Marginal Utility

7. TU MU AU

8. • Consumer’s equilibrium means a situtation under which
he spends his given income on purchase of a commodity
in such a way that gives him maximum utility and he
feels no urge to change
Consumer’s Equilibrium

9. • Utility analysis approach –Marshall-cardinal
• Indifference curve approach-Prof.J.R.Hicks-Ordinal
Two approaches of CE

10. • 1.Consumer’s equilibrium in case of a single commodity
through utility approach
MU of a product
=price of product
MU of a rupee
2.In case of two commodities
MU x = MU y
Condition of consumer’s
equilibrium

11. • Marshall’s analysis is confined to a single good model
whereas Hicks takes into account combination of two
commodities and expresses ‘level of satisfaction’ instead
of utility
Consumer’s equilibrium
through Indifference
curves

12. • A combination of amounts of two goods will b called a
bundle.
• The set of bundles available to the consumer is called
budget set
• Budget line is the graphic presentation of all the bundles
which a consumer can actually buy with his entire income
at the prevailing market prices
Budget line

13. Budget line
P1X1+P2X2=M

14. • Slope of Budget Line : it is negatively sloped ,the slope of
budget line is equal to ratio of prices of two goods
• Shift of Budget line: Consumer income
• Budget constraint: consumer can afford to spend within
his given income and prevailing prices

15. • An indifference curve is a curve which shows all those
combination of two goods that give equal satisfaction to
the consumer
Indifference cure

16. • 1.indifference curves always slope down from left to right
• 2.Higher indifference curves represents higher level of
satisfaction.
• 3.indifference curves are always convex to the origin
because MRS of two goods continuously falls
• 4.IC cannot touch or intersect each other
Properties of IC

17. • The consumer behaves rationally.
• The consumer can rank bundles on the basis of
satisfaction
• Price of goods and income are given
• A consumer’s preferences are monotonic( consumption of
more quantity of a good means more satisfaction)
Assumptions

18. • It measures the consumer’s willingness to pay for one
goood in terms of the other good.it is because consumer’s
preference for goods is such that he is willing to give up
some amount of one good for an extra amount of the
other without affecting his total utility
MRS

19. • When marginal rate of substitution is equal to ratio of
prices of two goods i.e MRS =Px/Py
• MRS is continuously falling
• Budget line should be tangent to indifference curve
• Indifference curve should be convex to the point of
origin.
Consumer’s equilibrium
under 4 conditions

20. Consumer’s equilibrium

21. • In the graph the equilibrium point at which budget line
AB just touches the higher attainable IC2 within
consumer budget at H .here both the conditions are filled
simultaneously .mind ,bunddles on the higher IC3 are not
affordable because his income does not permit whereas
bundles on the lower IC1 gives lower level of satisfaction
than at IC2.Hence the equ chice is only at the tangency
point P

22. • Demand for a particular good by A consumer means the
quantities of the good that he is willing to buy at different
prices within a given period of time
Demand

23. • Price of commodity
• Prices of related good – substitute goods, complementary
goods
• Income of the consumer- a)Normal goods b)Inferior good
• Tastes and preferences of the conumer
Factors determining
demand

24. • Other things being constant, quantity demanded of a
commodity is inversely related to the price of the
commodity
Law of demand

25. Price of sugar per kg in Rs.
Quantity Demanded Kg
20
2
16
3
12
4
8
4
5
6
Demand schedule- a tabular
presentation of quantities demanded at
different prices

26. Demand curve- graphical
representation of demand schedule

27. • No change in the income of the consumer
• No change in the taste ,preferences and habits of the
consumer
• No change in the number of family members ,weather
etc.,
Assumption of law of
demand

28. •
•
•
•
•
•
•
Inferior goods or giffen goods
Goods expected to become scarce or costly in future
Status symbol goods
Fashion
Necessities
Emergency
Future change in price
Exceptions to the law of
demand

29. •
•
•
•
•
Law of diminishing marginal utility
Income effect
Substitution effect
Number of consumers
Different uses of a commodity
Why does demand curve
sloping downward ?

30. • Expansion of demand- downward movement along a
demand curve
• Contraction of demand- upward movement along a
demand curve
the above changes occurs due to price
• Increase in demand-rightward shift in demand curve
• Decrease in demand-leftward shift in demand curve
The above changes is due to other than price of
commodity
Change in demand

31. • Individual the quantity of a commodity which an
individual is willing to buy at different prices in a given
period of time
• Market demand is the sum of demand by all buyers of a
commodity at a given period
Individual demand and
market demand

32. Individual and market
demand curve

33. • Price elasticity of demand
• Income elasticity of demand
• Cross elasticity of demand
Elasticity of demand

34. •
•
•
•
Perfectly inelastic demand –ed=0
Unit elastic demand – ed=1
inElastic demand- ed<1
Elatic demand- ed>1
Degree of price elasticity
of demand

35. Perfectly inelastic
demand

36. Inelastic demand

37. Elastic demand

38. Perfectly elastic

39. •
Any questions
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