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Consumer’s equilibrium in case of Single Commodity. (utility approach)

Consumer’s Equilibrium. Consumer’s equilibrium in case of Single Commodity. (utility approach).

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Consumer’s equilibrium in case of Single Commodity. (utility approach)

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  1. Consumer’s Equilibrium Consumer’s equilibrium in case of Single Commodity. (utility approach)

  2. Consumer’s equilibrium refers to a situation wherein a consumer gets maximum satisfaction out of his given income at the given market price of commodities .He has no tendency to change this situation. Two laws have been developed to explain consumer’s equilibrium. i) The law of Diminishing Marginal Utility. ii) The law of Equimarginal Utility.

  3. Law of Diminishing Marginal Utility • “The additional benefit a person derives from a given increase of his stock of a thing diminishes with every increase in the stock that he already has.” Alfred Marshall

  4. ASSUMPTIONS • Identical units • Consumption should be continuous. • Utility can be measured • A consumer should be rational.

  5. Consumer’s equilibrium in case of a single commodity is attained when he is consuming only one commodity and the marginal utility of the product in terms of money is equal to its price. • Consumer’s equilibrium in case of a single commodity is attained when: =price of product

  6. Since it is difficult t compare MU of a good with its price ,therefore, MU of a good is first converted in terms of money by dividing MU of a good with MU of a rupee (MU of a rupee is the extra utility when an additional rupee is spent on purchase of other available goods.)

  7. SCHEDULE

  8. Graphical presentation of equilibrium. y MU e MUm mu o x Units of orange

  9. The consumer will consume 5 units of oranges because the MU in terms of money is equal to the price of orange.

  10. Indifference curve approach • Indifference curve shows different combination of goods that yield the same level of utility or satisfaction to the consumer. • Assumptions: • (i) Rationality • (ii) Ordinality • (iii) Consistency of choice

  11. Properties of Indifference curve • A higher IC offers a higher level of satisfaction. • ICs are concave to the origin, because MRS tends to diminish. • ICs are negatively sloped. • ICs never touch or intersect each other.

  12. Equilibrium • Consumer’s equilibrium is struck when price line and IC are tangent to each other.

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