CONCEPT OF CONSUMER EQUILIBRIUM + Equilibrium is a point which provides the maximum benefit. * aconsumer is in equilibrium when he does not intend to change his level of consumption and he is getting maximum satisfaction with his Limited income. + the consumer is in equilibrium when given his income and market prices, he plans his expenditure on different goods and services in such a manner so that he maximizes his total satisfaction. Scanned with CamScannerASSUMPTIONS RELATING TO CONSUMER EQUILIBRIUM + RATIONAL CONSUMER -- rational consumer focuses on balancing the expenditure in such a manner so that he get the maximum satisfaction with the minimum expenditure . * Cardinal utility:- utility of every commodity can be measured in terms of Cardinal numbers such as 1 234. + independent utility ;- it is assumed that utility that a consumer gets from a commodity depends upon the quantity of that very commodity alone and it is not affected by the consumption of Other goods Scanned with CamScannerMARGINAL UTILITY OF MONEY + Marginal utility of rupee refers to worth of Rupee to a consumer . * as onsumer spend money on the commodity and after that he left with lesser money so the remaining money becomes dearer to the consumer and it increases the marginal utility of money. + If one rupee can buy 100g of sugar, 300g of rice and 300g of salt which represent a standard basket of goods to the consumer and if total utility from these goods is 4 util to the consumer than 4 is to be taken of marginal utility of money. + MARGINAL UTILITY OF MONEY REMAINS CONSTSNT Scanned with CamScannerCONSUMER EQUILIBRIUM IN CASE OF SINGLE COMMODITY + Aconsumer purchasing a single commodity will be at equilibrium when he is buying such a quantity of that commodity which gives him maximum satisfaction . + the number of units to be consumed of the given commodity by a consumer depend on factors like :- price of the commodity , marginal and total utility of the commodity , marginal utility of money Scanned with CamScannerDETERMINATION OF CONSUMER EQUILIBRIUM + To determine the equilibrium point, consumer compares the price of the given commodity with its utility. + being a rational consumer, he will be at the equilibrium when marginal utility is exactly equal to the price paid for the commodity . + We kmow marginal utility is expressed in utils and price is expressed in terms of money, however marginal utility and price can be effectively compared only when both are stated in the same units therefore marginal utility in is expressed in terms of money. Scanned with CamScannerScanned with CamScannergrammatic Illustration 4 shows consumer equilibrium when only one commodity is purchase, | JF y Consumer Equilibrium: One Commodity Case % Hy 2 £ Point of equilibrium: 3 € Py =MUy (in terms of rupees) be P, te. MU, (in cm of rupees) Commodity-x (units) (Note: Fig. 4 is NOT based on the data in Table 4. We have drawn ¢ smoothed MU, curve to keep the diagram simple.] a a Scanned with CamScannernote the following observations carefully with reference to Fig 4 (i) MUx’s a downward sloping curve showing that MU; declines as consumption of X increases. (This is in accordance with the law of diminishing marginal utility.) {iy Px indicates market price of commodity-X. It is fixed for the consumer and is taken to be equal to & 4. (iii) Each point on MUx curve shows the MU, in terms of money. It indicates the price that the consumer is willing to pay for each successive unit of the commodity. (iv) Equilibrium is struck at point C when byes he is willing to pay is exactly equal to the price he actually pays) In a state of equilibrium, the consumer buys 4 units of commodity-x. Alternative Presentation of Consumer Equilibrium: ‘One Commodity Case Let X be the commodity that the consumer buys ‘MU (rupee worth of satisfaction) = 2 utils” Py (price of commodity-X) = & 4 ‘Marginal Utility Schedule be as under: Units of Commodity-X | MU, (Utils) 1 20 = 2 18 ‘ (es ee 4 cxsfcon tate cay ee (5). : " The equilibrium is Struck when rupee to get (MUy) is equal to rupee worth of s Thus, equilibrium is struck when: MUy = MUy Rupee worth of satisfaction that Rupee worth of satisfaction that ‘the consumer actully gets the consumer expects to get ‘With reference to the above schedulé, the consumer strikes his equilibrium when: My _ Muy, = 3 -MU.= 8 (in a state of equilibrium) ‘The schedule shows thot MUx = 8, when 4 units of the commodity-X are consumed. “units of commodity-X are consume cia