Consumer

equilibrium and
Demand
• Utility is the power or capacity of a commodity
to satisfy human wants .
• Utility is subjective and cannot be measured
quantitatively, yet for convenience sake, it is
measured in units of pleasure or utility called
utils

Utility
• Marginal utility is the additional utility
derived from consumption of an additional
unit of a commodity
• MUn=TUn-TUn-1

Marginal utility
• Total utility is the sum of all the utilities
derived from consumption of an additional unit
of a commodity.
• Relationship between Marginal and Total utility
1.TU increases so long as MU is more than
zero
2.TU is maximum when MU is zero
3.TU starts declining when MU becomes
negative.
Total utility
Units of Marginal T0otal utility
oranges utility (utils)
consumed (utils)
0 - 0
1 10 10
2 8 18
3 5 23
4 2 25
5 1 26
6 0 26
7 -3 23

Relation between MU and TU

• As more and more units of a
commodity are
consumed ,marginal utility
derived from each successive unit
goes on falling

Law of diminishing
Marginal Utility
TU MU AU
• Consumer’s equilibrium means a
situtation under which he spends his
given income on purchase of a
commodity in such a way that gives
him maximum utility and he feels no
urge to change

Consumer’s Equilibrium
• Utility analysis approach –Marshall-
cardinal
• Indifference curve approach-
Prof.J.R.Hicks-Ordinal

Two approaches of CE
• 1.Consumer’s equilibrium in case of a
single commodity through utility approach
MU of a product = price of product
MU of a rupee
2.In case of two commodities
MU x = MU y

Condition of consumer’s
equilibrium
• Marshall’s analysis is confined to a single
good model whereas Hicks takes into
account combination of two commodities
and expresses ‘level of satisfaction’ instead
of utility

Consumer’s equilibrium
through Indifference curves
• A combination of amounts of two goods will
b called a bundle.
• The set of bundles available to the consumer
is called budget set
• Budget line is the graphic presentation of all
the bundles which a consumer can actually
buy with his entire income at the prevailing
market prices

Budget line
Budget line P1X1+P2X2=M
• Slope of Budget Line : it is negatively
sloped ,the slope of budget line is equal to
ratio of prices of two goods
• Shift of Budget line: Consumer income
• Budget constraint: consumer can afford to
spend within his given income and prevailing
prices
• An indifference curve is a curve which
shows all those combination of two goods
that give equal satisfaction to the consumer

Indifference cure
• 1.indifference curves always slope down from
left to right
• 2.Higher indifference curves represents
higher level of satisfaction.
• 3.indifference curves are always convex to
the origin because MRS of two goods
continuously falls
• 4.IC cannot touch or intersect each other

Properties of IC
• The consumer behaves rationally.
• The consumer can rank bundles on the basis
of satisfaction
• Price of goods and income are given
• A consumer’s preferences are
monotonic( consumption of more quantity of
a good means more satisfaction)

Assumptions
• It measures the consumer’s willingness to
pay for one good in terms of the other good.it
is because consumer’s preference for goods
is such that he is willing to give up some
amount of one good for an extra amount of
the other without affecting his total utility

MRS
• When marginal rate of substitution is equal to
ratio of prices of two goods i.e MRS =Px/Py
• MRS is continuously falling
• Budget line should be tangent to indifference
curve
• Indifference curve should be convex to the
point of origin.

Consumer’s equilibrium
under 4 conditions
Consumer’s equilibrium
• In the graph the equilibrium point at which
budget line AB just touches the higher
attainable IC2 within consumer budget at
H .here both the conditions are filled
simultaneously .mind ,bundles on the higher
IC3 are not affordable because his income
does not permit whereas bundles on the lower
IC1 gives lower level of satisfaction than at
IC2. Hence the equi choice is only at the
tangency point P
• Demand for a particular good by A
consumer means the quantities of the
good that he is willing to buy at different
prices within a given period of time

Demand
• Price of commodity
• Prices of related good – substitute goods,
complementary goods
• Income of the consumer- a)Normal goods
b)Inferior good
• Tastes and preferences of the consumer

Factors determining
demand
• Other things being constant, quantity
demanded of a commodity is inversely
related to the price of the commodity

Law of demand
Price of sugar per kg in Rs. Quantity Demanded Kg
20 2
16 3
12 4
8 5
4 6

Demand schedule- a tabular

presentation of quantities demanded at
different prices
Demand curve- graphical
representation of demand schedule
• No change in the income of the
consumer
• No change in the taste ,preferences and
habits of the consumer
• No change in the number of family
members ,weather etc.,

Assumption of law of
demand
• Inferior goods or Giffen goods
• Goods expected to become scarce or costly in future
• Status symbol goods
• Fashion
• Necessities
• Emergency
• Future change in price

Exceptions to the law of

demand
• Law of diminishing marginal utility
• Income effect
• Substitution effect
• Number of consumers
• Different uses of a commodity

Why does demand curve

sloping downward ?
• Expansion of demand- downward movement along a
demand curve
• Contraction of demand- upward movement along a
demand curve
the above changes occurs due to price
• Increase in demand-rightward shift in demand curve
• Decrease in demand-leftward shift in demand curve
The above changes is due to other than price of
commodity

Change in demand
• Individual the quantity of a commodity which
an individual is willing to buy at different
prices in a given period of time
• Market demand is the sum of demand by all
buyers of a commodity at a given period

Individual demand and

market demand
Individual and market
demand curve
• Price elasticity of demand
• Income elasticity of demand
• Cross elasticity of demand

Elasticity of demand
• Perfectly inelastic demand –ed=0
• Unit elastic demand – ed=1
• Inelastic demand- ed<1
• Elastic demand- ed>1

Degree of price
elasticity of demand
Perfectly inelastic
demand
Inelastic demand
Elastic demand
Perfectly elastic
 Any questions

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