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CONSUMER EQUILIBRIUM, Consumer’s Equilibrium, , X and Y are in Inverse relation / negative, , X and Y are in direct relation/positive, , X increases Y decreases, , X increases Y increases, , X decreases Y increases, , X decreases Y decreases, , Downward sloping, , Upward sloping, , Utility – Anything that has a power to satisfy human need is said to have utility. There are, two schools of thoughts in analyzing these concepts. They are as follow: 1. Cardinal Utility – It is assumed that utility can be measured and the measuring units, will be expressed in numerical units., 2. Ordinal Utility – It is assumed that utility derived by consuming a commodity can’t, be measured but can only be compared., , FEATURES OF UTILITY, 1. It is subjective concept which means it differ from person to person., 2. It is a relative concept which means utility derived from a commodity differ at a, different point of time., 3. Utility and usefulness do not go hand in hand all the time., 4. Utility and pleasure do not go hand in hand all the time., Chappati, 0, 1, 2, 3, 4, 5, 6, 7, , Total utility, 0, 10, 17, 21, 22, 22, 22, 20, , Marginal utility, 10, 7, 4, 1, 0, 0, -2

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TU = Total Utility, MU = Marginal Utility, MU =, , 𝜟𝑻𝑼, 𝜟𝑸, , MU = 𝜟𝑻, , TQ = 𝜮𝑴𝑼, , CARDINAL UTILITY, Total Utility - TU. It is the total satisfaction derived by consuming all the given units of, commodities. It is calculated by using the formulae., , 𝑻𝑼 = 𝜮𝑴𝑼, Marginal Utility (MU) = It is the net addition made to total utility because of consuming one, extra unit of commodity. For example – If the total utility by consuming two units of, commodity is 20 and 3 unit of commodity is 25, then in this case MU = 25 – 20 = 5., , Relationship between Total Utility and Marginal Utility, ➢, ➢, ➢, ➢, ➢, , When total utility increases marginal utility is positive., When total utility is maximum and constant marginal utility is zero., When total utility begins to fall marginal utility become negative., For the first unit of commodity consumed. Total utility and marginal utility are came., TU = ƐMU

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Q. Explain the law of diminishing marginal utility (DMU) with the help of example., Ans., The law of diminishing marginal utility explains that when a consumer, consumes a commodity on a continuous basis, the MU derived from the successive unit, keeps on falling as the previous unit consume had satisfied the consumer’s want up to, certain extent. We can understand this with the example given: Chappati, TU, MU, 0, 0, X, 1, 10, 10, 2, 17, 7, 3, 21, 4, 4, 22, 1, 5, 22, 0, 6, 22, 0, 7, 20, -2, In the above example we can see that the first unit of chapati it gives him the, maximum satisfaction. Further when the consumer continues to consume more and more, chapati we can clearly see the level of satisfaction derived constantly decreases or diminishes, as previous units consumed had satisfied the consumer’s want., Assumption of diminishing marginal utility, a) Continuity – This law stands true only when the commodity is consumed on a, continuous basis. If it is not so then the law might or might not follow., b) Homogeneity – This law stands trye only when the commodity is consumed, are homogeneous in nature. For example – the commodities consumed should, be identical in all aspects like quality, colour, taste, price, etc. If it is not so the, law might or might not stand true., c) Standard Size – This law stands true when the units of consumption is f, standard size would be a liter of water but not a tablespoon of water., d) Rationality – This law stands true in the case of rational human being. It, means a person consuming goods should identify a point where his, satisfaction become maximum., Q. How does a consumer attains an equilibrium in case of single commodity?, Ans., Units, 1, 2, 3, 4, 5, , Price, 60, 60, 60, 60, 60, , MU (in terms of money), 100, 80, 60 U = Price, 40, 20

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Consumer Equilibrium is a point where the consumer gets maximum satisfaction. In, the case of single commodity, consumer’s equilibrium can be identified as a point where, price for a commodity is equal to marginal utility (in terms of money) derived from it. We, can understand with the help of an example given above. In the above example we can see, that the consumer consumes the commodity, the price if which is ₹60 per unit. In order to, identify the point of equilibrium, the consumer will compare the price paid for the, commodity with the marginal Utility derived from it. Till the time the Marginal Utility, derived is more than or equal to price paid. Otherwise, the consumer will not consume. In the, above example the consumer will definitely consume the first unit of the commodity at the, price of ₹60 as he is getting the MU of value ₹100. In the similar way the consumer will, consume the second unit. He will also consume the third unit as the price is equal to MU., Which is known as the consumer’s equilibrium beyond this the consumer will not consume, the fourth and the fifth unit of commodity as the price paid is more than the MU derived., Assume: MUM = 4, Units, 1, 2, 3, 4, 5, , MUIC, 120, 100, 80, 60, 40, , Price, 20, 20, 20, 20, 20, , MU (in terms of money) = Price, , 𝑀𝑈𝑥, = 𝜌𝑥, 𝑀𝑈𝑀, Situation 1:, , 𝑀𝑈𝑥, = 𝑃𝑥, 𝑀𝑈𝑀, , MUIC (M), 120/4 = 30, 100/4 = 25, 80/4 = 20, 60/4 = 15, 40/4 = 10

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If MUX by PX is greater than MUM. In this case the utility derived is more than the, price paid for the commodity. Under such a situation, the consumer will continue to consume, 𝑀𝑈, till the time 𝜌 𝑥 = 𝑀𝑈𝑀 ., 𝑥, , Situation 2:, , 𝑀𝑈𝑥, < 𝑀𝑈𝑀, 𝑃𝑥, In such a situation the marginal utility derived is less than the amount paid for it. The, 𝑀𝑈, consumer here will reduce the consumption of the commodity till 𝜌 𝑥 = 𝑀𝑈𝑀 ., 𝑥, , Indifference curve Analysis. (ordinal), Combination, A, B, C, D, E, , X, 1, 2, 3, 4, 5, , Y, 12, 8, 5, 3, 2, , 1X +12Y, 2X + 6Y, 3X + 4Y, 4X + 3Y, 5X + 2Y, , Indifference Schedule is a table representing combination of two goods giving the, same level of satisfaction. Graphical Representation of an indifference schedule is known as, indifference curve. All the combination on a single indifference curve gives the same level of, satisfaction., , IC1 < IC2 < IC3

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Indifference Curve is a downward sloping curve as there is an inverse relation, between commodities X and Y, is so because in order to remain at the same level of, satisfaction if more of one commodity is consumed then few units of other commodity needs, to be sacrificed higher the indifference curve, higher the level of satisfaction., The family of Indifference curve is known as indifference map, MARGINAL RATE OF SUBSTITUTION …. (MRS), Combination, X, Y, MRS, A, 1, 12, B, 2, 8, 4:1, C, 3, 5, 3:1, D, 4, 3, 2:1, E, 5, 2, 1:1, Marginal rate of substitution is the rate at which one commodity is substituted for the other., It tells us about how many units of some commodity needs to be sacrificed in order to gain, few units of other commodity. It is also calculated by using the formulae., , 𝑀𝑅𝑆 =, , 𝛥𝑦, 𝛥𝑥, , MRS is always in a diminishing form as shown in the above example. It is known because in, the initial stage there is a scarcity of commodity X the required quantity. The Marginal utility, of commodity X in more than commodity Y. A rational consumer here would be ready to, sacrifice more units of commodity whose marginal utility is less with the commodity whose, marginal utility is more., , 𝛥𝑦, , Slope of IC = 𝛥𝑥, 𝛥𝑦, , MRS = 𝛥𝑥, , MRS = Slope IC

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FEATURES OF INDIFFERENCE CURVE, 1. It slopes downwards from left to right - IC curve is a downward sloping curve, because there exists an inverse relation between commodity X and Y. In order to, remain at the same level of satisfaction, If a consumer consumes more of one, commodity he will have to sacrifice few units of the other commodity., , Indifference curve can never be parallel to Y axis as in this case the consumption of X, remains constant due to which all combination will not give the same level of, satisfaction. In the similar way indifference curve can never be parallel to X axis as in, this case commodity Y remains constant. Indifference curve can never be upward, sloping as it indicates direct relationship between X and Y which cannot be with, Indifference curve., 2. Two indifference curves never intersect each other –, , Two indifference curves can never intersect each other. We can understand this with, the help of an example given above., Satisfaction from K and S will be equal to each other as they are lying on IC1. Similar, satisfaction from combination K and T will be equal to each other as they lie on IC2., We can conclude that satisfaction from combination S will ne equal to T which, technically is not possible as S in lying on IC1 and T is lying on IC2 and as per the, theory two indifference IC can never give the same level of satisfaction.

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3. It is convex to the origin –, , IC is convex to the origin as shown in the fig. 3.5 because the marginal rate of, substitution is in a diminishing form., It is not concave as shown in fig 1. Because this can happen only when MRS will be an, increasing form which is not possible in the case of IC, It is also not a straight downward sloping line as shown in the fig 1. As this happen only, when two goods are perfect substitute of each other which is not possible., , 4. Indifference curve does not touch either of the axis., , An IC cannot touch any of the axis as shown in the above figure. At point L were the IC, touches the Y axis the consumer is consuming only commodity Y where as the definition, of IC says that it is a combination of two goods giving the same level of satisfaction. For, the similar reason it cannot be at Point M where IC touches X axis, The consumer is, consuming only commodity X.

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5. Higher the indifference curve, higher is the level of satisfaction –, , As we move on higher IC, the level of satisfaction also increases. We can understand, this with the help of the given example, Combination P on IC1 indicated that the, consumer is consuming N units of bananas and M units of oranges. Combination Q, derived at the same level on IC2, indicates that the consumer is consuming N units of, bananas and M1 units of oranges. We clearly understand the combination of Q gives, more satisfaction than combination P., BUDGET LINE, , Budget Line is a combination of two goods that a consumer can buy with his given, income. Budget Line has a negative slope which means, its downward sloping. It is so, because with the same income when a consumer plans to consume more of one commodity., He has to sacrifice few units of other commodity. In a budget line it is assumed that the, consumer is spending his entire income and not saving his single rupee.

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Change in Budget line – It takes place when price of commodities falls or income of, consumer rises., , When price of A falls, other factors remaining the same then the budget line changes. The, budget line will rotate rightward from LM1 to LM2 as shown in the figure above. It is so, because now by spending the same amount of money the consumer will be able to purchase, more quantity of commodity A, , When the price of apple increases and other factors remain same. The budget line will rotate, leftward as shown in the figure above. It is so because now by spending the same amount of, money the consumer will be able to purchase less quantity of apple., , When price of goods 2 falls then we will be able to purchase more quantity of goods 2, at the same price.

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When price of Y increases, we will purchase less quantity of commodity Y at the, same amount. So Budget line shifts from LB to LB1., , When the price of the commodity X and Y falls and income remains the same or, income rises and the price if X and Y remains the same, the Budget line shifts to the right of, the original Budget line as shown in figure above. It is so because in both the cases the, consumer will be able to buy more quantities of commodity X and Y., Conditions under which Budget Line does not change., ➢ When price of X and Y falls and income also falls in the same ratio., ➢ When the price of X and Y increases and income also increases in the same ratio., , When price of X increases and price of Y decreases. Then Budget Line intersect., When Price of X decreases and Price of Y increases, Then Budget Line intersect.

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BUDGET LINE EQUATION, , Income = 500, Price of T-shirt = 100, Price of Movie ticket = 200, PX. QX + PY. QY = M, 200 x 1 + 100 x 3 = M, 200 + 300 = 500, SLOPE of the curve or Budget line =, , 𝜟𝒚, 𝜟𝒙, , Q., , How does a consumer attain an equilibrium with the help of Budget line, and Indifference curve?, , In case of indifference curve analysis and Budget Line, the consumer attains an, equilibrium at the point where the Budget line is Tangent to the highest possible IC,, we can understand this concept with the help of an example above. AB is the Budget, Line and IC1intersec t it at point M and N. Both this combination will give the same, level of satisfaction as they are lying on the same IC, and the amount spent on both, these combinations will be same as they are lying in the same Budget Line., IC3 is tangent to AB at point P, which is the point of Consumer’s Equilibrium. It is the, combination which gives the consumer maximum level of satisfaction as it is lying in, the highest IC. We can conclude that of all the combination M, N and P. The, consumer will prefer the combination P as amount spent on all the combination will

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be same as they are lying on the same budget line. But combination P will give, maximum satisfaction as it is lying on the highest Possible IC., At the point of equilibrium, the following conditions should be fulfilled:, 1) Budget Line should be tangent to the highest possible indifference curve., 2) At the point of equilibrium, the slope of Budget should be equal to the slope of, IC., The consumer will not be able to reach IC4 due to Budget Constant. In order to attain, IC4 following conditions should be satisfied, •, •, •, •, , Price of X should fall., Price of Y should fall., Income should increase., Price of X and Y both should fall.