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Lesson 5
Lesson 5
LECTURE FOUR.
Lecture objectives
Derive of the equilibrium condition and the demand curve for the consumer.
Concept of utility
Utility can be defined as satisfaction a consumer gets from consuming various goods and
services. Utility here is assumed to be quantifiable (measurable)
Total utility:- refers to the entire amount of satisfaction a consumer receives from consuming
various goods. Given that consumers consume different types of goods, say
x 1 ...x n , total
U =f ( x 1 , x 2 , x 3 ,. .. , x n )
utility is The more of an item a consumer consumes per unit of time,
the greater will be the total utility up to a certain point. When this point is reached, the
commodity will no longer give the consumer any utility. Such a point is known as saturation
point.
Marginal utility: - is the change in total utility resulting from a unit change in quantity of a
given commodity consumed.
Under normal circumstances marginal utility fall as more additional units are consumed.
Tabular representation of total and marginal utility.
∂TU
=MU
Units of comm. X. total utility (Utils) Marginal utility ∂Q
0 0 -
1 12 12
2 22 10
3 28 6
4 32 4
5 34 2
6 34 0
]
Total utility
35
U f X
* * TU
30 *
25
20 *
15
*
10
0
1 2 3 4 5 6 Units of Commodity X
Marginal utility
20
15
TU
MU X
* X
10 *
*
5 *
*
*MU
X
1 2 3 4 5 6 Units of Commodity X
he following two figures show total utility and marginal utility curve, representative
Total utility
MU x
nb ,m Ux
U
U f q x MU x
q x
TU
0 x qx 0 x qx
i.e.
U −p x⋅q x
The necessary condition for a maximum is that the partial derivative of the function with
respect to
q x be equal to zero.
∂ p ⋅q
Thus ∂ q x ∂ qx
Equation (i) defines the equilibrium condition for the consumer and it states that the
marginal utility of x is equated to market price of x.
Thus, if
MU > p x , the consumer can increase his welfare by purchasing more units of x.
notice, owing to law of diminishing marginal utility, as he consumes more of x,
MU x < p x , the consumer can increase his total satisfaction by reducing quantity of x
purchased, hence keeping more income unspent.
If there are more commodities( x , y ...n ) , the condition for the equilibrium is the equality of
the ratios of the marginal utilities of the individual commodities to their prices.
MU x MU y MU n
= = =λ
i.e p x py pn
Illustration/ Assignment
Question: determine the equilibrium quantities of commodities x and z for a consumer whose
total utility (U) and other relevant variables are given below;
U =20 x −4 z 2 + 40 z−x 2
x ( p x )=ksh .2
Price of
z ( p z ) =ksh . 4
Price of
Solution
MU MU
px pz
Y= p x⋅q x + p z q z
48=2 x+4 z .................................................... (5 )
48=2 ( 2 z ) +4 z
48=8 z
z̄=6 units
In our earlier discussion we saw that marginal utility of say commodity x may be depicted by
a line with a negative slope.
pX
MU X
Demand curve
MU 1 p1
MU 2 p2
MU 3 p3
QX
0x1 x 2 x3 x QX
MU X
Fig a Fig b
From Fig a, marginal utility of x declines continuously and becomes negative beyond
quantity x.
If the marginal utility is measured in monetary units, the demand curve for x is identical
to the positive segment of the marginal utility curve.
At equilibrium,
MU x = p x
At p2 - x2
At
p3 -
x3
Thus, diagram b gives the demand curve for consumer, and it is defined by the positive
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