consumer equilibrium mkt
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7/27/2019 Consumer Equilibrium Mkt
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UTILITYUtility refers to want satisfying power of a commodity.
In objective terms, utility may be defined as the amount of satisfaction derived
from a commodity or service at a particular time.
Assumptions:
UH:\Games.exetility can be measured.
Marginal Utility of money remains constant
No change in income of the consumer, his taste & fashion to be constant
No substitute
Independent marginal utility of each unit of commodity
UtilityCharacteristics: Utility is subjective/not measurable
Utility is variable
Utility is different from usefulness
No legal or moral connotations
Marginal Utility (MU)The word Marginal means Border or Edge.
It is the addition made to the total utility by consuming one more unit of a
commodity.
Total Utility (TU)Total Utility refers to the total satisfaction derived by the consumer from the
consumption of a given quantity of a good.
TU = Sum of all MURelationship between TU and MU
I. TU=sum of MU
II. TU increases so long as MU is positive.
III. When MU is zero, TU is maximum
IV. When MU is negative, TU is diminishing.
* The exponents of the utility analysis have developed two laws which occupy a
very important place in economics theory and they are :-
# Law of Diminishing Marginal Utility
# Law of Equi-Marginal Utility
Law of Diminishing Marginal UtilityThe additional benefit a person derives from a given increase of his stock of a thingdiminishes with every increase in the stock that he already has
Law of Equi-Marginal UtilityThe consumer will spend his money income on different goods in such a way that
marginal utility of each good is proportional to its price
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Consumers equilibrium
Consumer will attain its equilibrium (maximum satisfaction) at the point, where
marginal utility of a product divided by the marginal utility of a rupee, is equal tothe price.
Consumers equilibrium = Marginal utility of a product
Marginal utility of a rupee
= its price
CONSUMERS EQUILIBRIUM IN ONE COMMODITY
CASE
Consumer is in equilibrium when he gets maximum satisfaction.
He will get maximum satisfaction if MU of a commodity in money terms is equalto its price.
CONDITIONS OF CONSUMER EQUILIBRIUMSS
Px=MUx
Since it is difficult to compare MU of a good (expressed in utils) with its price(expressed in Rupees) therefore MU of a good is converted into MU of a Rupees.
By using following formula;
MUx MUx Px= ------------------ or MUm= ----------------
SCHDULEMU of Rs= 2.
Mum Px
No.of orange MU (utils) MU (Money) Price ofOrange
Gain
1 10 5 1 4
2 8 4 1 3
3 5 2.5 1 1.5
4 2 1 1 0(equilibrium)
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5 1 5 1 -0.5
Consumer equilibrium in two commodity caseConsumer will be in equilibrium if he allocates his expenditure so that the utility
gain from the last Rs Spent on each commodity is equal.
Law of DMU is extended to many goods because he buys many goods which the
consumer buys with his income.MUx MUx
Px= ------------------ or MUm= ----------------
Mum Px
MUy MUy Py= ------------------ or MUm= ----------------
Mum PyMUx MUy ----------------- = -----------------
Px Py
Equa 1
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Schdule in two commodity case
Units MUx (utils) MUy (utils) MUx/Px MUy/Py
1 20 24 10 8
2 18 21 9 7
3 16 18 8 6
4 14 15 7 5
5 12 12 6 4
6 10 9 5 3
M=24 Px=2 Py=3
Px . X + Py . y=M
2(6)+3(4)=24
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Indifference curveA curve which is a diagrammatic presentation of indifference set. It shows
different combinations of two commodities between which a consumer is
indifferent. Each combination offers him the same level of satisfaction.
Budget line:Budget line is a line showing different combinations of two goods which a consumer
can buy, given his income.
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