MICROECONOMICS

CONSUMER EQUILIBRIUM

PRIYANKA SINGH
PGT ECONOMICS
 CONSUMER EQUILIBRIUM

It refers to a situation under which the consumer spends his given income on the purchase of a commodity (or
combination of goods )in such a way that gives him, maximum satisfaction .

 A consumer is a person who buys goods and services for the satisfaction of his wants .

 Every consumer tries to get maximum satisfaction by spending his /her given income on various goods and services given
their prices .

 Every consumer wants to achieve the level of “UTILITY” ( which is the wants satisfying power of a commodity )
 CONSUMER
EQUILIBRIUM

CARDINAL APPROCH ORDINAL APPROACH

 Given by ‘ ALFRED MARSHALL ‘  Given by ‘J.R HICKS & R.G.D. ALLEN ‘

in 1890 in 1934
 It is the utility wherein the satisfaction  It states that the satisfaction which is not measured
derived by the consumers from the but can be ordered according to consumer’s
consumption of goods or services can be preference
measured numerically
 Measured in utils 1,2,3,……  Compared as rank preference 1st,2nd,3rd,…..
 It is also known as Utility Analysis /  It is also known as Indifference Curve Analysis
Marginal Utility Analysis  It is more realistic
 It is less realistic  Qualitative Approach
 Quantitative Approach  It promoted by Modern Economist
 It promoted by Classical and Neo classical
Economist
CONSUMER EQUILIBRIUM – Cardinal Approach

 When the utility is measured in terms of numbers like 1,2,3,4,…….

 Marshillian Approach

ASSUMPTIONS OF UTILITY ANALYSIS

 Rationality

 Measurable

 Diminishing marginal utility

 Constant Marginal utility of Money

 UTILITY
(U)
 Wants Satisfying power of a Commodity .

TU MU
TOTAL UTILITY MARGINAL UTILITY

 It refers to the sum total of  It refers to the additional

satisfaction derived from the satisfaction derived from
consumption of all units of a the consumption of
commodity . additional unit of a
 TU = Sum total of commodity .
marginal utility  MU = TU (n) – TU (n-1)
(sigma MU)
 RELATIONSHIP BETWEEN TU AND MU

 TU is the sum total of satisfaction whereas MU is the

additional or successive satisfaction of a commodity .

 As MU decreases then TU is increases at diminishing rate .

 When MU is zero then TU reaches at their maximum point

which is also known as ‘POINT OF SATIETY ‘ / POINT
OF SATURATION .

 And lastly MU is negative then TU is falling .

LAW OF DIMINISHING MARGINAL UTILITY
( Gossen’s first law of Consumption )
 The Law of Diminishing Marginal Utility states that the amount
of satisfaction provided by the consumption of every additional
unit of a good decrease as we increase the consumption of that
good.

 Marginal Utility is the change in the utility derived from the

consumption of an additional unit of a good.

 As consumers consumes more and more the marginal utility

from every successive units fall , then it reaches at zero , and
lastly reaches at negative level , so MU falls continuously with
every successive unit of a commodity .
 CONSUMER EQUILIBRIUM

SINGLE / ONE SEVEREL / TWO

COMMODITY CASE COMMODITY CASE
SINGLE COMMODITY CASE

It refers to a situation under which the consumer spends his given income on the purchase of one
commodity in such a way that gives him, maximum satisfaction .

Consumer equilibrium depends on two factors :

 Price of a commodity (Px)
 Marginal utility of a commodity (Mux)
 Marginal utility of money which remains constant (MUm)

CONDITIONS

I. MUx = Mum
Px

II. MU goes on falling

 Consumer is in
Equilibrium at 4 units
where, MUx = Px
(25=25) at point E which
is the intersection point of
marginal utility and
price .
BUDGET LINE

 It refers to the attainable combination of two

goods where, income of consumer and price of
a commodity is given . G
O
O
D
EQUATION OF BUDGET LINE
PxQx + PyQy = M
Y
Whereas Px ,Py are prices of commodity Qx,Qy
are quantities of commodity and M is the income
of a consumer
GOOD X

SLOPE OF
BUDGET
The shape of budget lie is determined by the size of
LINE the income of the consumer and the ratio of prices
Px of two commodities
Py
1. MUx / Px = MUm

MUx > Px
• It is a situation of disequilibrium and a consumer getting more satisfaction
from commodity X due to fall in price .

• To attain a Equilibrium (MUx = Px )consumer decide to purchases more and more units of
good X in near future , so marginal utility falls down due to law of diminishing marginal
utility .And Mum remains constant .
Mux < Px
• It is a situation of disequilibrium and a consumer getting less satisfaction
from commodity X due to rise in price .

• To attain a Equilibrium( MUx = Px ) consumer decide to purchases less and less units of
good X in near future , so marginal utility rises due to law of diminishing marginal
utility .And Mum remains constant .

2. MU goes on falling
Because of law of diminishing marginal utility . MU must diminish as more
and more units of a commodity are consumed in a given time period .
TWO COMMODITY CASE
(LAW OF EQUI MARGINAL UTILITY)
It refers to a situation under which the consumer spends his given income on the purchase of
different commodites (or a combination of goods )in such a way that gives him, maximum
satisfaction .
Consumer equilibrium depends on two factors :
 Price of both commodity (Px) , (Py)
 Marginal utility of both commodity (MUx) , (MUy)
 Marginal utility of money which remains constant (MUm)

CONDITIONS

I. MUx / Px = MUy /Py = Mum

II. MU of both the commodities goes on

falling
 Consumer equilibrium
at point E ,
Where MUx /Px = MUy/Py = MUm,

(Px =Py = Rs 1 ) MUx =Muy(8 =8 )

1. MUx /Px = MUy /Py

MUx / Px > MUy /Py

• It is a situation of disequilibrium , the consumer is getting more marginal utility per rupee in
case of good X as compared to good Y.
• Therefore , he will buy more of X and less of Y. This will lead to fall in MUx and rise in MUy.
• He /She will continue to buy more of X and less of Y till equilibrium ( MUx/Px= MUy/Py )

MUx / Px < MUy /Py

• It is a situation of disequilibrium , the consumer is getting more marginal utility per rupee in
case of good Y as compared to good X .
• Therefore , he will buy more of Y and less of X . This will lead to fall in MUy and rise in MUx.
• He /She will continue to buy more of Y and less of X till equilibrium ( MUx/Px= MUy/Py )
The price of both commodity remains constant .
2. MU goes on falling

Because of law of diminishing marginal utility . MU must diminish as more

and more units of a commodity are consumed in a given time period .

CONSUMER EQUILIBRIUM – Ordinal Approach

 It states that the satisfaction which is not measured but can

be ordered according to consumer’s preference

 Indifference curve analysis

ASSUMPTIONS OF INDIFFERENCE CURVE ANALYSIS

 Rationality

 Ranked/ Based on preference

 Diminishing marginal rate of substitution

 More goods more utility

BUDGET SET

o All bundles on or below the budget line constitute the budget set .

o  Budget set or opportunity set includes all possible consumption bundles that someone can
afford given the prices of goods and the person's income level .

o PxQx + PyQy < M

Shifting and Rotation of Budget line :

I. Change in Income
II. Change in Prices of commodity
 INDIFFERENCE CURVE

It refers to the combination of two goods which gives the same level of satisfaction .
MRSxy = change in Y / change in X

Marginal rate of substitution (MRS) is the rate at

which a consumer can give up some amount of one good
in exchange for another good while maintaining the same
level of utility.
Features of Indifference curve
1. IC never touches the axis
2. IC is downward sloping from left to right
3. IC is convex to the origin
4. Higher IC shows higher level of satisfaction
5. Two IC’s never intersect each other
CONSUMER EQUILIBRIUM UNDER INDIFFERENCE CURVE
ANALYSIS

It refers to a situation under which the consumer spends his given income on the purchase of different
commodites (or a combination of goods )in such a way that gives him, maximum satisfaction with a
given and price of a commodity , and there is no tendency to change .

ASSUMPTIONS
 Consumer is rational
 Utility is ordinal
 Consumer spends his entire income
 MRSxy is continuously falling

CONDITIONS

1. Slope of IC = Slope of Budget line 2. MRSxy is continuously falling

MRSxy = Px /Py
EQUILIBRIUM AT POINT E ,
MRSxy = Px /Py

CASE 1
MRSxy > Px/Py
 It means the consumer is willing to
sacrifice more and more units of good Y as
compared to the need of market .
 This induces him to buy more of good X by
applying law of diminishing marginal utility
till MRS equate to Px/Py
CASE 2

MRSxy < Px/Py

 It means the consumer is willing to sacrifice less and less units of good Y as
compared to the need of market .
 This induces him to buy less of good X by applying law of diminishing marginal
utility till MRS equate to Px/Py

2. MRS must fall continuously

Due to the convexity of IC with no flat portion . This is the complementary

situation of 1st condition .