CONSUMER EQUILIBRIUM

PRESENTED BY – MRS. SHUBHRA SHARMA

 • CONSUMER IS THE ONE WHO USES GOODS AND SERVICES FOR DIRECT
SATISTFACTION OF HIS WANTS
• CONSUMER BEHAVIOR REFERS TO THE WAY IN WHICH CONSUMER SPENDS
THEIR INCOME
• THE COMSUMER DERIVES UTILITY FROM ITS EXPENDITURE
• UTILITY MEANS WANT SATISFYING POWER OF A COMMODITY
• PROF. MARSHALL MEASURES UTILITY CARDINALLY IN TERMS OF UTILS
• CARDINAL MEASUREMENT OF UTILITY MEANS UTILITY OR SATISFACTION CAN BE
MEASURED IN TERMS OF NUMBERS LIKE 1,2,3
CONCEPTS OF UTILITY –
1. TOTAL UTILITY – IT IS THE TOTAL SATISFACTION DERIVED FROM THE
CONSUMPTION OF ALL THE UNITS OF THE COMMODITY
2. MARGINAL UTILITY – IT REFERS TO ADDITIONAL UTILITY ON ACCOUNT OF
CONSUMPTION OF EVERY ADITIONAL UNIT OF COMMODITY
• MU IS THE SLOPE OF TU, IT DEFINES THE BEHAVIOR OF TOTAL UTILITY

Tux = ∑Mux
MU = ∆TU/∆Q
RELATION BETWEEN TOTAL UTILITY AND MARGINAL UTILITY
THE LAW OF DIMINISHING MARGINAL UTILITY –
• CONCEPT WAS GIVEN BY PROF H. H. GOSSAIN AND IS CALLED GOSSAIN’S FIRST LAW OF
UTILITY
• ACCORDING TO THE LAW AS MORE AND MORE UNIT OF A COMMODITY ARE
CONTINUOUSLY CONSUMED, MARGINAL UTILITY FROM EVERY ADDITIONAL UNIT
DIMINISHES
• THIS BEHAVIOR HAS UNIVERSAL APPLICABILITY
ASSUMPTIONS –
• UNITS OF COMMODITY MUST BE HOMOGENOUS
• CONSUMPTION OF COMMODITY MUST BE CONTINUOUS
• COMMODITY MUST BE IN ADEQUATE QUANTITY
• KEEPING THESE ASSUMPTIONS MU ALWAYS DIMINISHES
WITH EVERY ADDITIONAL UNIT CONSUMPTION
CONSUMER EQUILIBRIUM : CARDINAL APPROACH
• COMSUMER QUILIBRIUM REFERS TO A SITUATION WHERE CONSUMER GETS MAXIMUM
SATISFACTION WITH HIS GIVEN INCOME
• IT IS THE SITUATION WHICH CONSUMER DOES NOT FEELS TO CHANGE
• IN THIS SITUATION HE UTILISES HIS MONEY INCOME FULLY AND RATIONALLY

ASSUMPTIONS –
• COMSUMER IS RATIONAL
• UTILITY IS MEASURED CARDINALLY
• BASED ON LAW OF DIMINISHING MARGINAL UTILITY
• NO CHANGE IN INCOME AND PRICE
• MARGINAL UTILITY OF MONEY IS CONSTANT

ONE COMMODITY CASE :

• WHEN SINGLE COMMODITY IS CONSUMED, CONSUMER GETS HIGHEST SATISFACTION WHERE MU
OF COMMODITY IS EQUALS TO ITS PRICE
• THE SATISFACTION DERIVED MUST BE EQUAL TO ITS PROCE PAYED
• CONSUMER IS GUIDED BY LAW OF DIMINISHING MARGINAL UTILITY
• PRICE IS CONSTANT AND MARGINAL UTILITY OF x IS DIMINISHING
• AT POINT ‘C’ EQUILIBRIUM TAKES PLACE WHERE MU IS EQUALS TO PRICE
• CONSUMER EQUILIBRIUM TAKES PLACE AT FOURTH UNIT OF THE COMMODITY

TWO COMMODITY CASE :

• CONSUMER EQUILIBRIUM WHEN MORE COMMODITIES ARE CONSUMED IS BASED
ON EQUI-MARGINAL UTILITY
• THIS LAW STATES THAT CONSUMER STRIKES THE EQUILIBRIUM WHEN THE LAST
RUPEE GIVES IN EQUAL MARGINAL UTILITY WHETHER HE SPENDS IT ON x OR y
• THIS IS GOSSEN’S SECOND LAW OF UTILITY
CONDITION OF EQUILIBRIUM :
EQUILIBRIUM WILL TAKE PLACE WHERE THE RATIO OF MU AND PRICE OF ALL THE
COMMODITIES IS EQUAL AND IT IS EQUAL TO MU OF MONEY.
CONDITION OF CONSUMER EQULIBRIUM:
• EQUILIBRIUM IS STRUCK AT POINT Q WHERE MUx = MUy
• AT THIS THE COMSUMER CONSUMES FOUR UNITS OF x COMMODITY
AND SIX UNITS OF y COMMODITY
• IT IS BASED ON EQUI MARGINAL UTILITY
• WHEN EQUILIBRIUM OF MARGINAL UTILITY OF x AND y IS AT MORE
THAN ONE POINT THE CONSUMER DECIDES IT BY BUDGET EQUATION
THANKYOU!