consumers equilibrium with utility approach

Sum total of satisfaction that the consumer derives when a certain number of units of particular commodity are consumed

TU=F(Qx) or TU=∑MU

TOTAL UTILITYMARGINAL

UTILITY

It means addition to the total utility from the consumption of an one more unit of a good.

Mun = TUn-TUn-1

or, Mux = ∆Tux ∕ ∆Qx

Assumptions of the Utility Approach

• Utility can be cardinallymeasurable, i.e. can be expressed in exact units;

• Utility is measurable in monetaryterms;

• Consumer’s income is given;

• Prices of commodities are given & constant;

• Constant Marginal Utility of Money

As a consumer goes on coming more and more units of a commodity the additional benefit that he derives from the additional unit of a commodity goes on falling

MUx

Marginal

utility ( in

Rs.)

Quantity

Consumer EquilibriumIt refers to a situation under which aconsumer spends his entire income onpurchase of a good in such a manner thatgives him maximum satisfaction and he hasno tendency to change it.

Condition of Consumer Equilibrium

MUx \ Px =MUm

where,MUx = Marginal Utility of Product ‘x’

Px = Price of ‘x’

MUm = Marginal Utility of money

• MUx = MUm * Px ty of Money

Marginal Utility of the good = Utility of Price paid

UTILITY SCHEDULE OF A CONSUMER

Graphical Presentation

Consumer’s Equilibrium –One Commodity

Price, Utility

Quantity

CASE OF A SINGLE COMMODITY

For the consumer

Utility obtained−Benefit.

Price Payable−Cost.

A consumer will continue to consume additional units of a commodity till the point where his marginal utility (in terms of money ) is greater than or equal to the price of the commodity.

Being a rational consumer he wouldn’t pay more price for a product that gives him lesser sati

LOCATING CONSUMER EQUILIBRIUM

Questions for self-Evaluation

• Define utility.

• What is marginal utility ?

• Explain the law of marginal utility with the help of example.

• What does consumer equilibrium mean?

• State the condition of consumer’s equilibrium in the case of single commodity.