CHAPTER-2

CONSUMER
EQUILIBRIUM
TOPICS TO COVER
• INTRODUCTION
• CARDINAL UTILITY APPROACH
• CONCEPT OF UTILITY
• LAW OF DIMINISHING MARGINAL UTILITY
• CONSUMERS EQUILIBRIUM
• ORDINAL UTILITY APPROACH (INDIFFERENCE CURVE ANALYSIS)
• BUDGET LINE
• CONSUMERS EQUILIBRIUM BY INDIFFERENCE CURVE ANALYSIS
INTRODUCTION
• DEFINATION OF CONSUMER
A consumer is an individual who consume goods and services to satisfy
his needs and wants.

• DEFINATION OF UTILITY
It refers to want satisfying power of a commodity.
Utility is measured in terms of utils
It differ from person to person, time to time and place to place.
 • TOTAL UTILITY
It refers to the total satisfication
receives by consuming all units of the
commodity.
TYPES OF
UTILITY
• MARGINAL UTILITY
It refers to the satisfication receives
by consuming one additional units of a
commodity.
MUn=TUn-TUn-1
RELATIONSHIP BETWEEN TOTAL
UTILITY AND MARGINAL UTILITY.
• When TU increases, MU decreases but remains positive.
• When TU reaches maximum, MU reaches zero (0).
• When TU decreases, MU goes negative.
• The point were TU reaches maximum is known the point of
saturation.
• The point were MU reaches zero (0) is known as the point of
satiety.
 TU AND MU

UNITS MU TU
1 20 20
2 16 36
3 10 46
4 4 50
5 0 50
6 -6 44
LAW OF DIMINISHING MARGINAL UTILITY
• The law states that when we consume more and more units
of a commodity, the additional satisfaction receives from
each successive units keeps on decreasing.

ASSUMPTION
1. Consumer is rational.
2. Consumption is continuous.
3. Quality of the commodity should remain constant.
4. Size of the commodity remains constant.
5. Price of the commodity and income of the consumer remains
constant.
 LAW OF DIMINISHING MARGINAL UTILITY

UNITS TU MU
1 20 20
2 36 16
3 46 10
4 50 4
5 50 0
6 44 -6
CONSUMER EQUILIBRIUM
Consumer’s equilibrium refers to the situation when a
consumer is having maximum satisfaction with
limited income and has no tendency to change his way
of existing expenditure.
Consumer equilibrium can be discussed under two
different situations
Consumer spends his Consumer spends his
entire income on a single entire income on a single
commodity commodity
We’re going to have a great year of
learning together.