Consumer Equilibrium , Properties of Indifference curve Utilities , Budget Line , Bundles, Consumer Behavior, MRS

1. Micro – EconomicsNotesClassXI – Hum&Com.
Chapter 3
Consumer equilibrium (Utility analysis)
Who is consumer?
A consumer is an economics agent who uses goods and services for the direct satisfaction of
hisher wants
Consumers behavior
It is a behavior in which consumers spend its limited income or various goods and services in
such a way he obtain maximum satisfaction
Utility - it refers to satisfaction derived from the consumer of a commodity
Cardinal measurement of utility -means that utility can only be ranked (high or Low) it cannot
be expressed in term of units like 1, 2,3etc.
Total utility – It is the sum of total utility derived from the consumer of all the units of a
commodity
Marginal Utility - Refers to additional utility on account of consumer of an additional unit of a
commodity.
Relationship between TU & MU
1. As long as MU positive TU increased
2. When MU is Zero TU is maximum or constant
3. TU=sumMU
4. MU curve is the slop of TU curve
5. MU = Change in TU/ Change in Qty
Law OF DMU
It state that as more and more standard unit of a commodity are continuously consumed MU
derived from every additional unit must decline Indeed it is very natural to happened in respect
of all goods and services . It is therefore called fundamental law of satisfaction or Fundamental
psychological law.
The given additional benefit which a person derived from a given increase of his stock of a thing
diminishes with every increased in the stock that he already has – Marshall
Assumption of DMU-
1. Cardinal measurement of utility: it is assumed that utility can be measured and it can
be expressed in numerical terms as 1, 2, 3, etc.
2. Monetary measurement of utility: it is assumed that utility can be measured in
monetary terms.
3. Continuous consumption: it is assumed that consumption is a continuous process. For
example, if one ice-cream is consumed in the morning and another in the evening, then
second ice-cream may provide equal or higher satisfaction.
4. No change in quality: quality is assumed as uniform and constant.
5. Fixed income and prices: it is assumed that income of the consumer and prices of the
goods are assumed to be constant.
Exception of Law Of DMU
 Hobbies
 Music and poetry

2. Micro – EconomicsNotesClassXI – Hum&Com.
 Drinking(alcohol)
 Reading
Concept of Consumer Equilibrium
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.
Consumer Equilibrium In case of single commodity
Consumer purchasing a single commodity will be at equilibrium, when he is buying such a
quantity of that commodity which gives him maximum satisfaction.
Mum=MUx/Px
Condition:-
1. If MUx > P, then consumer is not at equilibrium and he goes on buying because benefit
is greater than cost. As he buys more, MU falls because of operation of the law of
diminishing marginal utility. When MU becomes equal to price, consumer gets the
maximum benefits and is in equilibrium.
2. When MUx < Px, then also consumer is not at equilibrium as he will have to reduce
consumption of commodity x to raise his total satisfaction till MU becomes equal to price.
Consumer Equilibrium In case of two commodities
It refers to the situation where consumer wants to allocate his money income between the two
goods to attain the equilibrium position.
This case is also known as Equi-marginal utility
 Law of substitution
 Law of horsen’s second
Therefore this state that a consumer got maximum satisfaction when ratio of marginal utility of
second commodity and their respective prices are equal and MU as consumption increased
MUx/PX=MUy/Py=Mum
Chapter 4
Consumer Equilibrium _ Ordinal Utility Analysis
Consumption Bundle: - It refers the combination of the quantity of two goods. This is also
called bundle of goods EX. (X1, X2)
Would denote a bundle having X1 Amount of goods one and X2 Amount of Goods 2
Similarly (20, 22)
 20 units of X1
 22 Units of X2
Budget Set: - refers to all consumption bundles that the consumer can buy using his money
income at the pricing market price.
It depends on 2 factors:-
 Consumer money income
 Price of good 1 and good 2

3. Micro – EconomicsNotesClassXI – Hum&Com.
Budget Line: - it represents different bundles that the consumer can purchase spending his
money income at given prices.
Where,
P1X1= P2X2
It is graphical presentation of all those bundles which cost the amount just equal to the income
of the consumer.
Features:-
1. BL is a straight assuming that entire income is spend
2. Slop of budget line depends on bdget of both goods
3. It is a negative slop curve or downward sloping curve
4. It implies that increase in consumption of one commodity is followed by increased in
consumption of the other goods.
5. Slop of BL is equal to price ratio of second goods P1/P2.
Change in Budget Line
1. Shifts in BL
 BL shifts forward (without changing its slop) when income of the Consumer increased
price are assumed as constant
 BL shifts backward ( without changing its slop ) when income of the consumer
decreased prices are assumed as constant
2. Rotation of BL
 BL rotates to the right when Px or Py falls as in Fig 8.16 & 8.17.
Indifference Curve
An indifference curve is a curve that
represents all
the combinations of goods that give the same satisfaction to the consumer. Since all the
combinations give the same amount of satisfaction, the consumer prefers them equally. Hence
the name indifference curves.

4. Micro – EconomicsNotesClassXI – Hum&Com.
Properties of IC
1. IC slopes Downward;- It means that an IC has a Negative slop . It is because if the
consumer wants to have more unit of one goods, he will have to reduce the numerous of units
of another goods in order to maintain same level of satisfaction
2. IC is convex to the origin: - it is because of MRS. MRS= Change in X/ change in Y
3. IC to the right represents higher level of satisfaction
4. IC does not cut each other; - It is because if they cut each other the result is paradox or
contradiction
5. IC never touch X- axis or Y axis:- IC analysis is based on ordinal utility analysis which
assume consumption of two goods if touches axis it will against the assumption.
Marginal Rate of Substitution (MRS) is the amount of a good that a consumer is willing to
consume compared to another good, as long as the new good is equally satisfying. MRS is
(Tool) used in indifference theory to analyze consumer behavior.