consumer equilibrium mkt

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.

consumer equilibrium mkt

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