overview of chapter

P θ
CH - 2

∞
?
Consumer
>
- Equilibrium [Theory of consumer

Behavions
α

>
- Carodinal Approal &

.? →
>
- ordinal Appaoach ]
CH -

law
of demand [Direction]
&

Elasticity of demand [magnitude

 whobuysgodorServic Chapter
I
-consumer Equilibris

&ร consemir Behavious

d d
Cardinal
Approach Ordinal Approach
£ α

Alfred£ marshall Hicks& Alen

↓

be
satisfaction can
only Rankings can

measured be given
α
k
Law mo
of Indifference curse

δ lime
& Budget
( mRs)
one /two Goods
=

two Goods ,

different Approach
same Rescelt
-
= -
* What is
utility
It is a want
satisfying power of commodity
d

when a
commodity is
capable of satisfying human wants ,
we can conclude
that
commodity has
utility

* How we can measure it ?

that be measured in numercial . But

Economist believed
utility
ter ms

can

there standard .
was no unit
for utility

derived
So ,
Gonomist an
Imaginary measures ,
know as
_
UTIL
_

Utils to
imaginary psycological unit which is
: meanne
are a used

satisfaction obtained
from consumption a
of certain
quantity of
a
commodity .

* characteristics of utility :

Actual satisfaction
2 . It is derieved or
of
a
commodity
.
2 It is different from usefulness.

3
satisfaction is
different from pleasure

It time
4 .
differs to time , person to person & place to place .

derived
mu is additional
utility from
consumption of one more unit of
Given
dity
.
commo

mu =
In - Th +

TV is total satisfaction obtained from

possible unit
one
comumstion
all
of
TV =
< mu
Practical problems on to my

Urits π mU

5
2 5

3
3 38

4 u8 ω

5 55 7

units mu v

9 9)

2 6 5

3 4 19

4 2

6 2 19

units V ㎡

6 6
_

12
2 28

3 6

4 6
42

5 ω 2
 * Cardinal Approach
Utility
!-

Assumption! -

1) Consumer is Rational

2) Cardinal utility of measurement

3 Monetary measument
of utility
2) IndependentUtility >
-

5) constant mo
money >
-
If you have500 first 100 a last 100 my is same
of ,

# law
of Dimishing marginal utility
,

Law DMV states that utils

of , as we consume more a more
gaay
Commodity ,
utility derived from each successive unit
goes on
decreasing
_
_ schedule
^

Units
_
√ u-
TU mu Cz) P √ mu-P
CIutel Iz ]
y 20 ∅ ‰ 0 ω

2 6 36 6 6

consumert z 96 ω

Equilibrium
⑧ y -

5 ⑤ D

6 6 6 16
[
‰
-
- -

Disutility where mu becomes

Negative
Point
of satiety -
Where Mr becomes Zero .

-It where
consumer
Equilibrium refers to a situation a consum is
having
→
maximum with limited income has
salsfaction a no

tendency to
change his
way of Existing Expenditure .

Additional Assumption
!

6) continuous consumption
7) Resonable portion.
8)
Homogeneous quality
9) constant price
10)
Perfect knowledge
.
iiagna ⑦ properties

(i) TV starts with

origin but

MV starts with a constant

.

(ii) T
where
o rises ,
mu
falls but

But Remain the

(iii) when is reaches maximum ,

mu

becomes Point
,
2
200
of satiety

(iv) when zo
falls ,
mu
falls
Become
But -
ve .
 Consumer Equilibrium

Equilibrium means a state

of rest or a
position of No change
.

A said in He
when derives
consumer is to be consumer Equilibrium
maximum
satisfaction
Consumer equilibrium refer to a Situation when a consumer is having maximum satisfaction
with limited income a has no tendency to chase his way of existing expenditure

↓ ↓
consumer
、
spends his conseimer
spends his
Entire income on a
Entire
、

income on

SINGLE COMMODITY Two COMMODITY

I SINGLE COMMODITY
=

conseemer Equilibrium can be expressed as

=- Mu =
MUm

# Two Commodity

the law either

of DMU Applies in case
of
one
commodity or one use

.
commodity
of a

In real life ,
a consumer
normally consume more than one commodity
.

In such a situation ,
"Law of Equi-marginal Utility" helps a

his income .
optimum allocation
of
 According to law
of Equi-marginal utility , a consumer
gets
maximum satisfaction when rations Mr commodities
,
of of two &

their respective prices are

equal & Mr
falls as consumption increases.

There 2
are
necessary
condition to Attain CE

2) The ratio
of Marginal utility to
price is same in
case
of Both
goods

二 mum
=

When Px =

Py ,
then CE can be restated as MUx =
May

& mu
falls as
consumption increases .
* Limitation of Cardinal utility :-

be
2) utility can
cardinally measured .

2) it is can't beExpressed
However , a
feeling of mind ,

in Exact units
* ORDINAL UTILITY APPROACH [Indifference curve r
=
Hicksian Analysis]
δ
It is
_
the
utility Expressed in ranks [ can not be measured]
=>
↓
more realistic than Cardinal Approach
_

⑦ Indifference curve
Budget eine
α d

satisfaction of
cost
a
commodity ↓
α
similar to mu
similar to
P

1 ร

consumer Equilibrium

E Indifference curve -

*
Assumptions : -

Two commodities -
>
consumer have which to be
.
1
fixed money ,
is
spent
on the two .
goods

monotonic [more less]

Non-satiety preference
2 .
>
-

3 . Ordinal
utility
-
consumer can bank his preference Inourable
4 .
Rational consumer

.
5
Diminishing Mrs

* Law
of Indifference curve

when one
commodity is obtained ,
another
commodity has to be obtained
at rate
diminishing
.
* schedule

combination Apple (A) Banana (B) MRS AB

P 2
←

θ 2 5B
: 1 A

R 6 wa
3

S 3 3=
1

7 5
Z

Rate subsitution
Marginal of
Mrs to rate at which the
refers commodity
a are
←

substituted with each other , so that the total satisfaction

Remain same .

-
MRSAB Units Banana (B) to sacrifice
willing
=

of

Unite
of Apples (A)
willing to
gain

MRSAB
AB
→
=

is Indifference
- MRS a
slope of curve -
*
g
& Indifference
curve

It
refers to
graphical

↓
various
representation o
alteralive combination
=

of Bundle
f
2
goods.
among which consumer

is Indifferent

other names !

>
->
Equal satisfaction curve

>
->
Iso-utility curve

(IA : 15 B ) =
( 2 AtroB) =
( BAt 63 ) * Indifference MAP

It to
refers
the
family of IC

=
℃UAt zB )

that
represent consumer

preference
over all the

Bundle
of the 2 Goods.
same level
of satisfaction
*
Properties of Diagram
-
:

) Indifference curve is Downward

sloping [Due to MRS]

(Due Diminishing MRS]

2) IC is
always convex to
origin to

the
3) Higher IC ,
higher the
satisfaction I
.

4) Indiffence cre cem never Interest Each other

>
-
Not
possible

5) An IC can never touch X-axis a y-axis

#
Budgel line

Consumer Budget states the seal Income Power

or
purchasing \

he
of the conserer
from which can
purchase certai

quantative Bundles
of
two Goods at a
given price .

N
Mr A has E20 .
Eg
.

Price ‰
of Apple =

Banana z10
price of
=

↓ ↓

BudgetSet Budget line

↓ £

{ }
( Il
) (2 00 C0 2) (1 0)
EC }
, , , , .
,

1 , 13 12 0). . (0 2] .

{ 0.12
,

(0 . 0)
↓ ↓

set
of all possible combination Set
of all possible combination
α ∝
with
given Income &
price spending all his become .

(savings possible) (No savings)

Schedule
*
Suppose customer has
ー

_
as Income

Price
of Apple EU .

Price Banana E2
of

「 ↑ 、

combination Apples Banana mRE

A
-

B 2 S 2

2 6 2
C

D 3 y 2

E 2 2

f 5 O z

line
Slope of Budget →
MRE is the rate at which

is denoted by M
one
goods is sacrificed

Cmarginal Rate of the

in market to

Exchauge] obtain an Extra unit

another Goods.
of

Tsrope of Budget line :

) mu
t '

I mni

'
t
Grain

2 ) [price ratio]

N
*
iagram exproperties

2 Downward
surping
[Due to MRE]

2 Straight line

[Due to constant MRE]

Chift
# in
Budget line

in the Income
2
Effect of change
:
consumer
of -

If these is a
change in consumer Income , assuming
will
no

change in
price of commodity , Budget live
shift

① Increase in Income -

shift
Rightward

② Deacreas in encome >

-

shift
leftward
 inPrices (Apple Banana)
.
2
Effect of change &

1) change in price of Both Goods " When Goods

falls
.

price of

budget line will shiff

.

Both
price falls : -

Rightward shift

rises
Both price :
leftward shift

2) change in
price of commodity on X-axis :
-Capples
when live Rotates
price of goods on X-axis
changes ,
Budget on

X- axis

fall in
price
=>
Rightward Rotation

Rises in
price
Rotation
=>
leftward

2) change in
price of commodity on
y-axis : -

(Banana)
when live Rotates
price of goods on
y-axis changes ,
Budget on

y axis
-

fall in
price
=>
Rightward Rotation

Rises in
price
Rotation
=>
leftward
 Consumer Equilibrium
^
·A
all
. oG

อดี
I
J
E ^
IL 3

f
∞ 9
IC
C

IC
℃ 2

9
y axig
-

Apples
.

condition Equilibrium
-

for consumer :

consumer Equilibrium achieves when

scope of FC =
Slope of BiL

: Ce is achieved when BL
=
makes a
tangent to

MRSxy =
+
Note : -

2) RRS continuously
falling
is