CONSUMER EQUILIBRIUM SPCC_06beee58-3a1e-4713-9054-c39541f674b2_121327-1-17-1-17.pdf
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This document discusses consumer equilibrium from a utility perspective. It defines total utility and marginal utility, and explains the law of diminishing marginal utility. Consumer equilibrium occurs when marginal utility of a good is equal to its price for a single good, or when the ratio of marginal utilities equals the ratio of prices for two goods. Examples are given showing consumption schedules and how equilibrium is reached graphically. The document provides essential definitions and concepts regarding consumer equilibrium in utility theory.
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This document discusses theories of consumer behavior, including:
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Utility refers to the ability of a good or service to satisfy a want. The document discusses several key concepts regarding utility:
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- Total utility is the sum of utility from consuming all units of a good. Marginal utility is the additional utility from consuming one more unit.
- The law of diminishing marginal utility states that as consumption increases, the marginal utility of additional units declines and can become negative.
- Consumer equilibrium occurs when the marginal utility per rupee spent equals the marginal utility of money, maximizing satisfaction within a budget constraint.
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FellowBuddy.com is an innovative platform that brings students together to share notes, exam papers, study guides, project reports and presentation for upcoming exams.
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The document discusses the theory of consumer behavior and utility. It explains that consumers attempt to maximize their utility or satisfaction given limited incomes by allocating money across different goods and services. Utility is defined as the satisfaction derived from consuming a good and is a subjective concept that varies between individuals. Total utility is the satisfaction from consuming all units of a good, while marginal utility is the change in satisfaction from consuming an additional unit. The law of diminishing marginal utility states that as consumption of a good increases, the satisfaction from each additional unit decreases. The ordinal approach measures utility based on preferences and indifference curves, which show combinations of goods that provide equal utility.
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- 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)
- 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
- 16. Q2.
- 17. Thank you KEEP ON SUPPORTING