This document discusses consumer equilibrium and utility analysis. It defines consumer equilibrium as the state where a consumer spends their income on commodities to achieve maximum satisfaction given prices. It then discusses the cardinal and ordinal approaches to measuring utility, defining utility as the satisfaction from consuming goods. It explains the concepts of total utility, marginal utility, and the law of diminishing marginal utility. Finally, it introduces indifference curves and how they illustrate combinations of goods that provide equal utility to consumers, showing the relationship between utility and budget constraints.

1. CONSUMER’S EQUILIBRIUM
AND UTILITY ANALYSIS
ANOOP SAINI

2. CONSUMER'S EQUILIBRIUM MEANS A STATE OF MAXIMUM SATISFACTION. A
SITUATION WHERE A CONSUMER SPENDS HIS GIVEN INCOME PURCHASING
ONE OR MORE COMMODITIES SO THAT HE GETS MAXIMUM SATISFACTION AND
HAS NO URGE TO CHANGE THIS LEVEL OF CONSUMPTION, GIVEN THE PRICES
OF COMMODITIES, IS KNOWN AS THE CONSUMER'S EQUILIBRIUM.
CONDITIONS OF CONSUMER’S EQUILIBRIUM:
CONSUMER UTILITY APPROACH CAN BE UNDERSTOOD BY TWO WAYS:
1. CARDINAL APPROACH (UTILITY ANALYSIS): ACCORDING TO THIS APPROACH
UTILITY CAN BE MEASURED. “UTILS” IS THE UNIT OF UTILITY.
2. ORDINAL APPROACH (INDIFFERENCE CURVE ANALYSIS): ACCORDING TO THIS
APPROACH UTILITY CANNOT BE MEASURED BUT CAN BE EXPRESSED IN
ORDER OR RANKING.

3. MEANING OF UTILITY:
UTILITY:
UTILITY IS THE POWER OR CAPACITY OF A COMMODITY TO SATISFY
HUMAN WANTS. ALTERNATIVELY, UTILITY OF A COMMODITY MEANS
THE AMOUNT OF SATISFACTION THAT A PERSON GETS FROM
CONSUMPTION OF A GOOD OR SERVICE.
EXAMPLES:
BOOK FOR READING &
CAR FOR DRIVING

4. MEASUREMENT OF UTILITY:
TWO TYPES OF UTILITY ARE THERE:
1. CARDINAL UTILITY
2. ORDINAL UTILITY
CARDINAL UTILITY:
IT STATES THAT THE SATISFACTION THE CONSUMER DERIVES BY CONSUMING
GOODS AND SERVICES CAN BE MEASURED WITH A NUMBER.
CARDINAL UTILITY IS A QUANTITATIVE METHOD THAT IS USED TO MEASURE
CONSUMPTION SATISFACTION.

5. ORDINAL UTILITY:
IT STATES THAT THE SATISFACTION THE CONSUMER DERIVES
FROM THE CONSUMPTION OF GOODS AND SERVICES CANNOT BE
MEASURED IN NUMBERS.
ORDINAL UTILITY USES A RANKING SYSTEM IN WHICH A RANK IS
PROVIDED TO THE SATISFACTION THAT IS DERIVED FROM
CONSUMPTION.
ORDINAL UTILITY IS A QUALITATIVE METHOD THAT IS USED TO
MEASURE CONSUMPTION SATISFACTION.

6. TOTAL UTILITY (TU) AND MARGINAL UTILITY
(MU):
TOTAL UTILITY: IT IS THE SUM TOTAL OF UTILITY DERIVED FROM THE
CONSUMPTION OF ALL THE UNITS OF A COMMODITY. FOR EXAMPLE, IF 2 UNITS OF A
COMMODITY ARE CONSUMED AND 1ST UNITS GIVES SATISFACTION OF 10 UNITS,
WHILE THE 2ND UNIT GIVES YOU SATISFACTION OD 9. SO THE TOTAL UTILITY HERE
WOULD BE 10+9= 19 UTILS (UNITS OF UTILITY).
MARGINAL UTILITY: IT REFERS TO ADDITIONAL UTILITY ON ACCOUNT OF THE
CONSUMPTION OF AN ADDITIONAL UNITS OF A COMMODITY. FOR EXAMPLE, IF 10
UNITS OF A COMMODITY GIVE SATISFACTION OF 100 UTILS, AND 11 UNITS OF A
COMMODITY GIVE SATISFACTION OF 105 UTILS, THEN ADDITIONAL UTILITY IS 5 UTILS.
(105-100=5)

8. RELATIONSHIP B/W TOTAL UTILITY
(TU) & MARGINAL UTILITY (MU)
QUANTITY TOTAL UTILITY MARGINAL UTILITY
1 10 10 INITIAL UTILITY
2 18 18-10=8
3 24 24-18=6 POSITIVE
4 28 28-24=4
5 30 30-28=2
6 30 30-30=0 ZERO
7 28 28-30=-2 NEGATIVE

9. LAW OF DIMINISHING MARGINAL UTLITY
MEANING:
The law of diminishing marginal utility states that, “as a
consumer consumes more and more units of a specific
commodity, utility from the successive units goes on
diminishing”.
“ALSO KNOWN AS GOSSEN’S FIRST LAW”.

10. ASSUMPTIONS OF THE LAW:-
ASSUMPTIONS ARE –
• Various units of goods are homogenous.
• There is no time gap between consumption of the different
units.
• Consumer is rational
• Tastes, preferences, and fashion remain unchanged.
• Consumers posses perfect knowledge of the price in the
market
• No price change
• Utilities of different commodities are independent of each other

11. • EXPLANATION OF THE LAW:
• Suppose a person is thirsty and the price of water is zero. He takes one
glass of water which gives him great satisfaction. We can say the first
glass of water has great utility for him.
• He then takes second glass of water. The utility of the second glass of
water is less than that of first glass of water. The utility declines because
the edge of his thirst has been blunted to a great extent. If he drinks third
glass of water, the utility of the third glass will be less than that of second
and so on. It is the position of consumer’s equilibrium or maximum
satisfaction.
• If the consumer is forced further to take a glass of water, it leads to
disutility causing total utility-to decline. The marginal utility will become
negative.

12. THE FOLLOWING TABLE WILL MAKE THE LAW OF
DIMINISHING MARGINAL UTILITY MORE CLEAR.
Units Total Utility Marginal Utility
1st glass 20 20
2nd glass 32 12
3rd glass 40 8
4th glass 42 2
5th glass 42 0
6th glass 39 –3

13. THE GRAPH WILL MAKE THE LAW OF
DIMINISHING MARGINAL UTILITY MORE CLEAR

14. LIMITATIONS OR EXCEPTIONS OF THIS LAW
• Not applicable in case of intoxicants or liquor.
• Not applicable for misers.
• Rare collections.
• Utility is subjective.
• Every commodity is not an independent commodity.

15. INDIFFERENCE CURVE
ANALYSIS
ANOOP SAINI

16. DEFINITION OF 'INDIFFERENCE
CURVE'
• AN INDIFFERENCE CURVE IS A GRAPH SHOWING
COMBINATION OF TWO GOODS THAT GIVE THE
CONSUMER EQUAL SATISFACTION AND UTILITY.
EACH POINT ON AN INDIFFERENCE CURVE
INDICATES THAT A CONSUMER IS INDIFFERENT
BETWEEN THE TWO AND ALL POINTS GIVE HIM THE
SAME UTILITY.

17. ASSUMPTIONS OF IC ANALYSIS
Rational Consumer
Ordinal Utility
Diminishing Marginal Rate of Substitution.
.

18. INDIFFERENCE CURVES
A(1, 22)
Apples
1 2 3 4 5 6
8
6
4
2
0
24
22
20
18
16
14
12
10
INDIFFERENCE SCHEDULE
(Table Showing Different
Combinations giving Equal
Satisfaction)
Combination Apples Oranges
Oranges
A 1 22
B 2 14
C 3 10
D
E
4
5
8
7

19. INDIFFERENCE CURVES
NDIFFERENCE SCHEDULE
Combination Apples Oranges
A
B
1
2
22
14
C 3 10
D
E
4
5
8
7
8
6
4
2
0
1 2 3 4 5
A(1, 22)
24
22
20
18
16
14
12
10
Oranges IC1
Apples

20. MARGINAL RATE OF
SUBSTITUTION (MRS)
MRS xy Increase in the Consumption of X
The marginal rate of substitution of X for Y (MRSxy) is defined as the
amount of Y, the consumer is just
willing to give up to get one more unit of X and maintain the
same level of satisfaction.
= Decrease in the Consumption of Y = ∆ Y
∆X

21. LAW OF DIMINISHING MRS
MRS is measured by
the slope of
the indifference
curve
MRS = -O/A = 8:1
12
10
8
6
4
2
0
1 2 3 4 5
A
24
22
20
18
16
14
Oranges
IC1
Apples
MRS = 2:1
MRS = 4:1

22. BUDGET LINE or BUDGETCONSTRAINTS
(What is Attainable)
Budget constraints limit an individual’s ability to consume
in light of the prices they must pay for various goods and
services.
Budget line or Price Line: Shows all possible combinations
of two goods that the consumer can buy if he spends the
whole of his given sum of money on his purchases at the
given prices.

23. BUDGET LINE
Com Apples binat
(@ Rs. 6 ion
per unit)
Oranges
@ Rs. 2
Per unit
Total
budget
(Rs.)=6xA
+2xO
A 0 12 24
B 1 9 24
C 2 6 24
D 3 3 24
E 4 0 24 Budget line corresponding to
budget of Rs. 24

24. CONSUMER EQUILIBRIUM
Consumers choose a combination of goods that will maximize
the satisfaction they can achieve, given the limited budget
available to them.
The maximising combination must satisfy two conditions:
It must be located on the budget line.
Must give the consumer the most preferred combination
of goods and services.

25. •THANK YOU………