MICROECONOMICS
CONSUMER’S EQUILIBRIUM :
➢ Meaning
➢ Approaches for consumer’s equilibrium
CONSUMER = ?
A Consumer is one
whose main activity is to
consume goods and
services for the
satisfaction of his / her
wants .
EQUILIBRIUM = ?
Equilibrium is
defined as a state
of balance or a
stable situation
where no changes
are occuring .
CONSUMER’S EQUILIBRIUM
When a consumer buys any goods or
services , his / her main objective is to get
maximum satisfaction from the quantity of
the commodities purchased by spending
his / her income at the given market price
.
Consumer’s equilibrium refers to a
situation in where the consumer has
achieved maximum possible satisfaction
from the quantity of the commodities
purchased given his / her income and
APPROACHES FOR CONSUMER’S EQUILIBRIUM
[Link] Approach / Cardinal Utility Approach /
Marshallian Approach
Given By:- Alfred Marshall
Case -1 : Single Commodity
Case -2 : Double Commodities
2: Indifference Curve Approach / Ordinal Utility
Approach / Hicksian Approach
Given By – Allen & Hicks
CONCEPT OF
UTILITY
TYPES OF UTILITY
UTILITY SCHEDULE & DIAGRAM
RELATIONSHIP BETWEEN TOTAL UTILITY & MARGINAL UTILITY
i. As long as MU decreases but
remains positive , TU increases but
with a diminishing rate .
ii. When MU becomes Zero then TU
reaches to maximum . This level is
known as ‘Point of Satiety or Point
of saturation’
iii. When MU becomes negative ,
TU starts declining .
LAW OF DIMINISHING MARGINAL UTILITY
This law was first given by a German Economist “H.H.
Gossen” , and is named after him ,’Gossen’s First Law Of
Consumption’.
This law is also known as “Fundamental Law of
Satisfaction” or “Fundamental Psychological law”
CONSUMER’S EQUILIBRIUM IN CASE OF SINGLE COMMODITY
Unit of Good-X MU (Utils) Px (₹/unit) MUm
1 20 2 20÷2 = 10
2 16 2 16÷2 = 8
3 12 2 12÷2 = 6
4 8 2 8÷2 = 4
5 4 2 4÷2 = 2
6 2 2 2÷2 = 1
CONSUMER’S EQUILIBRIUM IN CASE OF TWO COMMODITIES
Unit of Good-X & MUx
Good-Y MUy
1 20 14 5 7
2 16 12 4 6
3 12 10 3 5
4 08 08 2 4
5 04 06 1 3
BUNDLES / CONSUMPTION BUNDLES
A bundle / consumption bundle refers to the combination of the amount of two
goods which a consumer is buying with help of his given level of income on given
prices of two goods .
For E.g: The bundle (5,4) shows 5 units of Good – X & 4 units of Good-Y .
The consumption bundles is of two types :
1) Attainable / Feasible bundles : Those bundles which a consumer is able to
buy with help of his given level of income on given prices of two goods
because its total expenditure is less or equal to the money income of the
consumer , are known as Attainable bundles / Feasible bundles .
2) Non- Attainable / Non- Feasible bundles : Those bundles which a consumer is
not able to buy with help of his given level of income on given prices of two
goods because its total expenditure is more than the money income of the
consumer , are known as Non - Attainable bundles / Non- Feasible bundles .
BUDGET SET
A Budget set refers to the set of all those attainable combination of two goods which a
consumer is able to but with help of his given level of income on given prices of two goods .
It includes all those bundles whose total expenditure is either less or equal to the money
income of the consumer .
Example: Suppose Px = ₹ 4/unit & Py = ₹ 2/unit .
The money income of the consumer is equal to ₹ 20 . The budget set is shown as follows .
BUDGET LINE / PRICE LINE
A budget line shows the graohic representation of all those bundles , which cost the amount just
equal to the consumer’s money – income , gives us the budget line .
Thus , a budget line represents the different combinations of two goods (or bundles) that the
consumer can purchase by spending all his money – income , given the prices of the goods .
Equation of Budget Line: P1X1 + P2X2 = M
Example :- Suppose , P1 = ₹ 4/unit & P2 = ₹ 2/unit
The Schedule & Diagram is shown as follows
MARKET RATE OF EXCHANGE (MRE) / PRICE RATIO
It refers to the rate at which amount of one good is to be sacrificed in order to
buy an additional unit of other good to maintain the same level of expenditure .
It is also know as price ratio because the amount of MRE is equal to the ratios of
prices of prevailing two goods.
PROPERTIES OF BUDGET LINE
1)Budget line is Downward sloping from left to Right : A budget line
shows the maximum possible combination of two goods which a
consumer can buy with help of his given level of income on given
prices of two goods . In such a case more amount of one good is to be
purchased by sacrificing some amount of other good because of
limited money income . It means there is an inverse relationship
between amount of both the goods . So budget line is downward
sloping from left to right or negatively sloped line .
2) Budget line is a straight line curve : A budget line is a straight line
curve because of constant MRE or Price Ratio . It means same amount
of one good is to be sacrificed to consume an additional unit of other
good to maintain the same level of expenditure .
MONOTONIC PREFERENCE
INDIFFERENCE
CURVE
An indifference curve is a diagrammatic presentation of those
combination of two goods which offers the consumer the same
level of satisfaction .
It is represented with help of following schedule & diagram .
BUNDLES Rice (units) Wheat (units)
A 1 12
B 2 8
C 3 5
D 4 3
E 5 2
INDIFFERENCE
MAP
An indifference Map is
a collection of
different indifference
curves which shows
different level of
satisfaction to the
consumer
MARGINAL RATE OF SUBSTITUTION (MRS)
PROPERTIES OF INDIFFERENCE
CURVE
1) Indifference curve is downward sloping
from left to right : An indifference curve
shows the combination of those two goods
which gives same level of satisfaction to the
consumer . In such a case more amount of
one good can be consumed by sacrificing
some amount of other good in order to
maintain the same level of satisfaction . It
means there is an inverse relationship
between amount of both the goods . So
Indiference curve is always a downward
sloping curve from left to right .
2) Indifference curves are always
convex to the origin : An
indifference curve is convex to the
origin because of diminishing MRS
.MRS declines continuously
because of the law of diminishing
marginal utility . As seen in diagram
, when the consumer consumes
more and more of apples , his
marginal utility from apples keeps
on declining and he is willing to
give up less and less of bananas for
each apple . Therefore ,
indifference curves are convex to
3) Higher indifference curves
represents higher level of satisfaction
: Higher indifference curve represents
large bundles of goods , which means
more utility because of monotonic
preference . Consider point ‘A’ on IC1
and point ‘B’ on IC2 in given diagram .
At ‘A’ , consumer gets the combination
(OR , OP) of the two commodities x &
y . At ‘B’ , consumer gets the
combination (OS , OP) . As OS > OR ,
the consumer gets more satisfaction at
IC2 .
4) Indifference curves never intersect each
other : As two indifference curves cannot
represent the same level of satisfaction , they
cannot intersect each other . It means , only
one indifference cùrve will pass through a
given point on an indifference map . In
diagram , satisfaction from point A and from B
on IC1 will be the same . Similarly , points A &
C on IC2 also give the same level of
satisfaction . It means point B & C should also
give the same level of satisfaction . Hiwever ,
this is not possible , as B & C lie on two
different indifference curves , IC1 and IC2
respectively and represent different levels of
satisfaction . Therefore , two indifference
5) Indifference curve can never touch X – axis & Y – axis : The indifference curve
analysis assumes consumption of two goods i.e. two goods are always consumed .
• If indifference curve toiches Y – axis , it would mean that consumption of
commodity on the X – axis is zero .
• Similarly , if indifference curve touches X – axis , it would mean that
consumption of commodity on the Y – axis is zero .
So an indifference curve can never touch any of the axes.
CONSUMER’S EQUILIBRIUM THROUGH INDIFFERENCE CURVE
ANALYSIS
Under indifference curve analysis , the point of maximum
satisfaction is achieved by studying indifference map and budget line
together .
On an indifference map , higher indifference curve represents a
higher level of satisfaction than any lower indifference curve . So , a
consumer always tries to remain at the highest possible indifference
curve , subject to his budget constarint .
The consumer will get equilibrium where the following conditions are fullfilled :
• MRSxy = Px / Py
i.e, Slope of IC = Slope of budget line
It would be achieved at the point where budget line is tangent to IC
As budgetis line
• MRSxy can be tangent
continuously falling to one and only one
indifference curve , consumer maximises his satisfaction
at point E , where both the conditions of consumer’s
equilibrium are satisfied .