Consumer’s equilibrium in case of Consumer’s equilibrium in case of

Single Commodity.Single Commodity.

(utility approach)(utility approach)

Consumer’s equilibrium refers to a situation Consumer’s equilibrium refers to a situation wherein a consumer gets maximum satisfaction wherein a consumer gets maximum satisfaction out of his given income at the given market price out of his given income at the given market price of commodities .He has no tendency to change of commodities .He has no tendency to change this situation.this situation.

Two laws have been developed to explain Two laws have been developed to explain consumer’s equilibrium.consumer’s equilibrium.

i) The law of Diminishing Marginal Utility.i) The law of Diminishing Marginal Utility.

ii) The law of Equimarginal Utility. ii) The law of Equimarginal Utility.

Law of Diminishing Marginal Law of Diminishing Marginal UtilityUtility

““The additional benefit a person The additional benefit a person derives from a given increase of his derives from a given increase of his stock of a thing diminishes with stock of a thing diminishes with every increase in the stock that he every increase in the stock that he already has.”already has.”

Alfred MarshallAlfred Marshall

ASSUMPTIONSASSUMPTIONS

Identical unitsIdentical units

Consumption should be continuous.Consumption should be continuous.

Utility can be measuredUtility can be measured

A consumer should be rational.A consumer should be rational.

Consumer’s equilibrium in case of a single Consumer’s equilibrium in case of a single

commodity is attained when he is commodity is attained when he is consuming only one commodity and the consuming only one commodity and the marginal utility of the product in terms of marginal utility of the product in terms of money is equal to its price.money is equal to its price.

Consumer’s equilibrium in case of a single Consumer’s equilibrium in case of a single commodity is attained when:commodity is attained when:

MUofaRupee

ctMUofaprodu=price of product

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

SCHEDULESCHEDULEUnits of Units of oranges oranges consumconsumeded

MUMU

(Utils)(Utils)MU in MU in terms terms of of money money (Rs)(Rs)

Price of Price of orangesoranges

ProfitProfit

(Rs)(Rs)

11

22

33

44

55

66

1616

1414

1010

66

22

00

88

77

55

33

11

00

11

11

11

11

11

11

77

66

44

22

00

-1-1

Graphical presentation of Graphical presentation of equilibrium.equilibrium.

MU

Units of orange

mu

MUm

e

y

xo

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

Indifference curve approachIndifference curve approach

Indifference curve shows different Indifference curve shows different combination of goods that yield the combination of goods that yield the same level of utility or satisfaction to same level of utility or satisfaction to the consumer.the consumer.

Assumptions:Assumptions: (i) Rationality(i) Rationality (ii) Ordinality(ii) Ordinality (iii) Consistency of choice (iii) Consistency of choice

Properties of Indifference curveProperties of Indifference curve

A higher IC offers a higher level of A higher IC offers a higher level of satisfaction.satisfaction.

ICs are concave to the origin, ICs are concave to the origin, because MRS tends to diminish.because MRS tends to diminish.

ICs are negatively sloped.ICs are negatively sloped. ICs never touch or intersect each ICs never touch or intersect each

other.other.

EquilibriumEquilibrium Consumer’s equilibrium is struck when price Consumer’s equilibrium is struck when price

line and IC are tangent to each other.line and IC are tangent to each other.