Consumers equilibrium

CLASS 11
MICRO ECONOMICS
 NOTES
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EQUILIBRIUM
Utility
The want satisfying capacity of a commodity is called its utility. It
can be presented with the help of cardinal numbers such as 1, 2, 3...
The measuring unit of utility is Utils.

Total Utility
It refers to the sum of all the utilities which can be derived by
consuming all the units of a commodity. It is also called as the
addition of all the utility of a commodity by consuming the units.
TU = U1+U2+U3+…..Un
Where, U = utility from unit {1, 2, 3,…n}

Marginal utility
It refers to an additional utility which can be derived by consuming
one more unit of the commodity. In other words, marginal utility
refers to the change in total utility with respect to change in per
unit of consumption.

MU= TUn –TUn-1

Where, TUn = Total utility of current unit of consumption.

TUn - 1 = Total utility of previous unit of consumption.

MU= TU/ Q

Where, TU = Change in TU
Q = Change in per unit of consumption.

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RELATION BETWEEN TU AND MU

Total Utility (TU) Marginal Utility (MU)

It is the sum of all the utility which It is an additional utility which

can be derived by consuming all can be derived by consuming
the units of a commodity. one unit of a commodity.

TU= ΣMU MU=TUn-TUn-1

TU increases MU continuously decreases.

TU maximum MU becomes zero

TU declines MU becomes negative.

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Schedule

Units Total utility (TU) Marginal utility (MU)

1 50 50

2 90 40

3 120 30

4 145 25

5 155 10

6 160 5

7 160 0

8 158 -2

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Consumer equilibrium
It is a situation where a consumer secures maximum satisfaction
with minimum budget. It is called as a point of balance as the
consumer doesn’t want to change the level of satisfaction.
Hence, it can be derived as the quantity of output at which the
consumer maximizes its satisfaction with his/her given level of
income.

3 types of consumer equilibrium

1. In case of one commodity.
2. In case of 2 or more commodities.
3. In case of only 2 commodities.

1.Consumer equilibrium in case of one commodity

In case of single commodity the consumer is in equilibrium at
the quantity of units at which the marginal utility of good x is
equal the price of good x.

Assumptions
A consumer must be a rational one.
The Marginal utility of money must be constant.
The consumer must be continuous in consumption.
The budget or income of a consumer must remain
unchanged.

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Conditions
MUx/Px = MUm , Where,MUx/Px = Marginal utility of money
expenditure on good’x’
Mum = Marginal utility of money
MUx = Px
Value of marginal utility of good ‘x’ must be equal to one.
MUx/MUm=Px

Units MUx Px

1 20 5

2 17 5

3 15 5

4 12 5

5 5 5

6 3 5

7 2 5

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2.Consumer equilibrium in case of 2 or more commodities
In the case of 2 or more commodities a rational consumer is said
to be in equilibrium at a point at which the marginal utility of
money expenditure on both (2 and more) the goods are equal in
symbolic terms.
With the given level of income,
Also known as
Law of maximum satisfaction
Law of Equi-marginal utility
Gossen’s second law
MUx/Px = MUy/Py = Mum
In case of 2 or more commodities MUx/MUy = Px/Py

Schedule
Given, Money income = 60 rupees
Price of good ‘x’= 10 rupees, Price of good ‘y’= 5 rupees
Units MUx MUy MUx/Px MUy/Py

1 100 35 10 7

2 90 30 9 6

3 80 25 8 5

4 70 20 7 4

5 60 15 6 3

6 50 10 5 2

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According to the definition of consumer equilibrium in case of 2

or more commodities. In the given schedule, the consumer can
prefer different bundles of goods that are as follows:-
4 units of good ‘x’ and 1 unit of good ‘y’.
5 units of good ‘x’ and 2 unit of good ‘y’.
6 units of good ‘x’ and 3 unit of good ‘y’.

From the above three alternatives which alternative is best for

the consumer is decided by the given amount of income. In this
case, the second alternative is best i.e. 5 units of good ‘x’ and 2
unit of good ‘y’.
As, Income = 60 rupees Amount spend on good ‘x’ = 5(quantity)
10(price) = 50 rupeesAmount spend on good ‘y’ = 2 5 = 10
rupees.Total amount spent = 50+10 = 60 rupees= money income

Law of diminishing marginal utility

Statement of law
The law states that “When a consumer consumes a particular
commodity continuously then the utility derives from each
successive unit goes on diminishing”.

Assumption of law
The utility must be measured in cardinal numbers.
The income of a consumer must remain unchanged.
The consumption should be continuous in nature.
Quantity, quality and size of good must be same at all stages.
Marginal utility of money should also be constant.

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SCHEDULE DIAGRAM

Units MUx

1 50

2 40

3 30

4 20

5 10

6 0

7 -10

Point of satiety/Saturation Point:-Marginal utility becomes zero

(Point where consumer secures total possible satisfaction)

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3.Consumer equilibrium in case of only 2 commodities;-
In case of 2 commodities the consumer equilibrium can be
represented with the help of a curve known as Indifference
Curve(IC)
Indifference curve theory (I.C)/Ordinal curve theory:-
It is the alternative combination of consumption of 2 goods which
gives the same level of satisfaction.
In other words, It is a curve which represents about the various
combination of consumption of 2 goods which gives the same level
of satisfaction.
The curve IC1 represents indifference curve
which is same in terms of satisfaction at all
points. i.e. A=B=C ( in terms of satisfaction).
In case of indifference curve if the consumer is
consuming goods at point A(more quantity of
good y and less quantity of good x) , and now he
wants to increase the consumption of good x
then he must have to decrease the level of
consumption of good y( as when he increases
the consumption of good x he will get some
extra amount of satisfaction and in order to
retain at the same level of satisfaction he must
decrease the level of consumption of good y)

Properties of Indifference curve

1.IC slopes negatively
IC slopes negatively due to the substitution of good ‘y’ for good ‘x’.
The unit of good ‘y’ is sacrificed for one more unit of good ‘x’.

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MRS = (-)change y/change x

MRS stands for marginal rate of substitution.
It is the rate at which the consumption of one
unit of good ‘y’ is sacrificed for the
consumption of one more unit of good ‘x’

2.I.C is convex to the Origin

Units Good Y Good X ΔY ΔX MRS

1 20 1 ----- 1 ------

2 15 2 5 1 5:3

3 12 3 3 1 3:1

4 10 4 2 1 2:1

5 9 5 1 1 1:1

3.I.C can’t touch or intersect each other

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There are 2 ICs which are intersecting each other at point B
In, IC1 A=B=C (in terms of satisfaction)
IC2 D=B=E (in terms of satisfaction)
But as per monotonic preference concern the consumer always
prefer to have higher bundle of goods then the lower one.
In the given diagram, at point ‘D’ the bundle of goods is less than
the bundle of goods at point ‘A’.
Similarly, the bundle of goods at point ‘E’ is higher than at point ‘C’.
Hence, the point ‘A’ and ‘E’ are superior than any other point in the
given diagram. Therefore, both gives higher level of satisfaction.
It means that our assumption and diagram is not practically
possible.
So, no 2 ICs can either touch or intersect each other.

Monotonic preference - It refers to the higher bundle of goods

which gives higher level of satisfaction than other.

4.Higher level of IC gives higher level of satisfaction or the

rightward shift of I.C always gives higher level of satisfaction
A parallel rightward shift of I.C always gives higher level of
satisfaction in compare to the lower one. Because the bundle of
goods are higher in shifted indifference curve as compared to the
lower one.
Here, IC1<IC2<IC3
That is A>B>C

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Indifference map
The set of indifference curves are known as indifference map.
In the given indifference map of a
consumer their exist 4 difference ICs All
the combinations that lies on a particular
IC gives same level of satisfaction. But
According to our property higher IC gives
high level of satisfaction. So, the level of
satisfaction on IC2 is greater than that of
IC1 and so on.

Budget line
It is a line which represents the alternative combination of
purchasing up of 2 goods with the given money income and price
of goods.
Equation of budget line
M = PxQx + PyQy

Where, M=Money income

Px= price of good ‘x’ Qx= Quantity of good ‘x’
Py= price of good ‘y’ Qy= Quantity of good ‘y’

Slope of budget line

The budget line slopes negatively (Px\Py) as money income of the
consumer remains constant. So, if a consumer wants to increase
the quantity of good ‘x’ purchasing then he must reduce the
quantity of good ‘y’.
Slope of budget line = px/py

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Budget Constraints
It is the limit of the consumer upto which he can purchase the given
quantity of the commodity. The limit is decided by his level of
income. That is less than or equal to the income of the consumer.
Px×Qx + Py×Qy ≤Money income

Points on budget line

Q=Under utilization of resources
A,B,C,D=Fully utilization of resources

Change in budget line

The budget line can be changed due to change in the following
elements….
1.Money income.
2.Price of good ‘x’.
3.Price of good ‘y’

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1.Money income increases

(other things remains constant)
(Px,Py,M↑)

2.Money Income Decreases

(Px,Py,M↓)

Change in Price of good y

1.Price of good y decreases
(M,Px,Py↓)

2.Price of good y increases

(M,Px,Py↑)

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Change in Price of good x
1.Decrease in price of good x
(M,PY,Px↓):-

2.Increase in price of good x

(M,PY,Px↑)

Consumer equilibrium
in case of indifference curve theory
The consumer is said to be in
equilibrium at the point at which both
indifference curve and budget line
intersect
That is at a point where the consumer
secures maximum level of
satisfaction(IC) with given level of
income (Budget line)
E = MRS (x→y) = Px/Py
Consumer equilibrium in case of I.C theory and budget line can
be presented with the help of 2 conditions
MRS (x→y)=Px/Py
The above statement implies that MRS between 2 goods must be
equal with the ratio of prices of 2 goods.
MR _(x→y)=Px/Py
Slope of Indifference curve = slope of budget line
ΔY/ΔX = Px/Py
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1.The I.C must be convex to the origin at the point of equilibrium
The consumer equilibrium is presented in the given diagram. In
which ‘ox’ axis measures units of good ‘x’ and y axis represents unit
of good ’y’. The budget line is sloping downward and IC is convex
to origin at the point of equilibrium, where budget line and IC are
equal (at point E)

NOTE
S.No Cardinal Ordinal

1 The utility is measured in Utility is measured in ordinal

quantitative number(1,2,3…) numbers.(Utility is given on the basis
of preferences..)

2 The utility can be expressed in 2 The utility can be expressed with the
theories..In one commodity In more help of …Indifference curveBudget
than 2 commodity line.

3 It is psychological in nature. It is real and comparable in nature.(

i.e. IC1> IC2)

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