GE-megdo-Eq-nosE.

bg
Consumer's Equilibrium and Demand (Theory of
Consumer Behaviour)

Mean / customer
CONSUMER :: Consumer is an economic agent who
consumes goods and services for DIRECT
SATISFACTION OF HIS / HER WANTS
: to get maximum satisfaction from spending
his
main objective
and services
income on various goods .

UTILITY :: It refers to want - satisfying power of a

(
commodity. Thus is refers to satisfaction derived from
↳ amount of
the consumption of a commodity.

Example - A bread has the power to satisfy hunger ,

books fulfil our desire for knowledge

> EI Anant satisfaction

mili is known as
utility

SPECIAL POINTS
(1)UTILITY IS NOT ALWAYS USEFULNESS :: The
dictionary meaning of utility is given as usefulness. But
in economics both terms are not same. A
commodity may not be useful, yet it may have utility for
a particular person. For example, liquor is considered to
be harmful for health, yet it may have a high degree
of utility for an alcoholic.
based on
your
astes and options instead of on facts

(2)UTILITY IS SUBJECTIVE as it varies from person

to person , time to time & place to place

(3)SATISFACTION NEED NOT NOT INVOLVE

ACTUAL PLEASUE E.G treatment of broken
legs only gives satisfaction to the patient but doesnot
provide him any pleasure

(4) Utility can be expressed in two different

ways namely :

CARDINAL UTILITY : It is given by Marshal .It

states that utility can be measured and compared in
numerical terms like 50, 40, 30.Thus the consumer can
-

assign utils to the commodities, like 20 utils to apple

and 15 utils to banana
ORDINAL UTILITY :: Given by Hicks and Allen. It
 states utility cannot be measured in numerical terms but
only can be expressed in preference terms. Thus if the
-

consumer likes apple more than banana, then he will give

1st rank to apple and 2nd rank to banana.

→
extra satisfaction

dtgder-F.edu It is the-additional utility

total
psychological satisba
'tq☆FgB
derived from the consumption

thataqeaeeeggnh-oat.rogiven commodity
RELATIONSHIP BETWEEN TOTAL UTILITY AND
MARGINAL UTILITY
m the consumption of .

units of
all possible a

commodity .
g- ☐
IF
Consumption of every -8-8*-80
§-@g☆oB
additional units adds to total
utility as we know

Relationship btw -102140

TU = MU1 + MU2 + MU3 + ..............+ MUN
Since MU diminishes in accordance with law of
diminishing marginal utility, thus relationship can be
explained as

(1)TU INCREASES AT DIMINISHING RATE

WHEN MU IS DECREASING BUT POSITIVE.
The shaded area under TU curve show the positive but
diminishing (size of area is decreasing) marginal utility
upto the 5th unit.

(2)TU IS MAXIMUM WHEN MU = ZERO. It means

that consumer doesnot have more desire for commodity
and this situation is known as SATURATION POINT
(6th unit)

(3)TU DECLINES WHEN MU GETS

NEGATIVE (7th unit)

Units of X TUX MUX

MU , -11402-1
1 50 (50 - 0) = 50 Tun = . . . .

2 90 (90 -50) = 40 Mun

3 120 (120 - 90) = 30
4
5
6
140
150
150
(140 - 120) = 20
(150 - 140) = 10
(150 - 150) = 0
µun=%%
7 140 (140 - 150) = - 10 Mun = Tun Tun
- -
I

1-V2 = 150+40=90
Mva I
to
=
=
 Y n

maximums
1- vis
180 -
^
constant

:-.•!:
+,
• I
120 -

go -

I
30 -

"
" " " " " " " > ×
0 2 3 7
I 4 5 61
1
Unit oft
y n
I 44211$ needs
sat point

MU
puritygatihai 9
1

go.mg?wationlbatiet
50
-
•

1
40 - •

£ 30
MU=O
-

20
- , ,

10 _ ,

>
: : :
y
×
ve )
MUC
-

i
"

s↓ses

Mu is + ve ↑ ,
TV ↑ses

maximum a
constant
MU -0
-
Tv is
,

Mu =
-
ve
,
TV trees
 ↑
1ˢᵗ Given by German
Ta
economist H.tl Gossen

Gossen 's
.

first law of
.

Ywn
'

as

!
tonsumption

LAW OF DIMINISHING MARGINAL UTILITY ( DMU )

This law states as the consumer has more and more

standard units of a commodity are continuously
consumed, marginal utility derived from every
additional unit must decline.

→ This law also states that after a certain level MU can

be negative due to unpleasantexperience or
dissatisfaction.

FOR EXAMPLE on a hot summer day, when a person

is very thirsty, he gets maximum satisfaction when he
drinks the first glass of water as his intensity of thirst is
 I

at its highest. The second glass of water will give him

less utility as intensity of thirst is reduced. The utility
from third glass will still be less.After he gets fully
satiated , any further consumption may cause
disutility. 102 ve )-

This is very natural and it happens in respect of all

goods and services. It is ,therefore, called
as “FUNDAMENTAL LAW OF SATISFACTION” or
“ Fundamental Psychological Law”

MARSHALL “ The additional benefit a person

derives from a given increase of his stock of a
thing diminishes with every increase in the
stock that he already has “

Units of X MUX
1 50
2 40
3 30
4 20
5 10
6 00
7 -10

→This law was first given

byGerman Economist H.H.
GOSSEN , therefore it was also
known as ‘GOSSEN’S F IRST
LAW.’ Prof. Boulding calls it “
Law of Eventually Diminishig MU
”

BASIC ASSUMPTIONS

(1) Commodity is consumed in some STANDARD

UNITS such as a cup of tea, a glass of water and NOT A
SPOON OF TEA OR WATER

(2)There is a CONTINUOUS CONSUMPTION of the

commodity as second glass of water after two hour may
give less , equal or more utility

(3) QUALITY OF COMMODITY SHOULD NOT

CHANGE as a refrigerated cold second glass of water
will give more utility .IN OTHER WORDS GOODS
CONSUMED SHOULD BE
HOMOGENEOUS (similar units)
(4) Consumer must behave in a RATIONAL MANNER

EXCEPTIONS :: MU MAY INCREASE

INITIALLY like in case of Money , Good
books.
LIMITATION :: Law of DMU says nothing
about the rate of decline of MU. It does not
specify whether MU falls at a slow rate or a fast
rate or constant rate. Thus this law is only
Qualitative and not quantitative

estate ofrest / change )

no

limited )
CONSUMER EQUILIBRIUM

/
MEANING :: Consumer’s equilibrium refers to a
situation where in a consumer gets MAXIMUM
SATISFACTION OUT OF HIS GIVEN INCOME and
he has no tendency to make any change in his existing
expenditure.
 CONSUMER EQUILIBRIUM ( under cardinal utility approach)

①
→ Two
Single bmmodity commodity

②when
→
price of ③ when
price of
each

commodity is two commodities are

same different
( under cardinal utility approach)
tguilibñum
in case
1) Consumer
of single commodity
.

first
☆ write equilibrium definition
Conditions
" °× Px
* plain why }
{ Mox
> en

1) Mox =
Px < Px

decreases with additional purchase

2) Total gain
after equilibrium

when ME a consumer
gains more
compared
satisfactionhim Hence
as

to sacrifice he makes in terms of poke paid by he

.
,

gets prepared buy more

to .
law of DMV operates ,
MU falls
buys and becomes equal
to price of the commodity .

'

{ zyada satisfaction
,
dnt
poke . we will consume more than
, }
 when MU *
< Px ,
a consumer suffer losses as he is
paying
more than what he
actually gains . He reduces consumption
MU becomes equal to
of the
commodity tell the
point where ,

price .

So ,
a consumer is at equilibrium where

Mox =
Px
satisfaction mil oahithiuska
ÑÑ cheez se hame
{
.

loss khaereedna band Kandy }

price jayadahai
→ ,

equilibrium
→ Total gain falls after
↓ Claw of DMV )
It ñ because MU

Mune Pre
after equilibrium

Consumer Equilibrium ( under Cardinal Utility Approach) in

case of Two Commodities : -

In such a case .
'
law of Gui Marginal utility helps
-
'

equilibrium
in
determining consumer
According to law of Gui -

marginal utility ,
a consumer
gets
maximum satisfaction ,
when ratios of MU if two commodities
and their prices are equal and Mu falls as consumption
increases .

Mum IMU of )
M¥- 140¥ rupee
=
= a

↳ when
price of each commodity 3 same .

The conditions of equilibrium are : -

1) MU ✗
=
Muy

2) law of DMV
operates
3) Expenditure on commodity n + Enpenditne on

tommodity y =
Money Income
When Price of Two commodities are different
of last
14,0¥ Mpg
MU
1) =
=
rupee spent
↳ (explain them in exam ! )
2) law of DMV operates
income Pini + Pzna M =

3) Total expenditure -
Money i. e.

A
M¥ M÷
>

1 A will buy more and more of ✗ , law of DMV opiates ,

person
Mu ✗ ↓ , muy ↑ till
14¥ M¥yˢ ) =

at
M%- Mp÷
<

and of Y law of DMV operates

buy
,
more
[A will more ,

person
Muy ↓ MU ✗ ↑ till
M¥- M¥yˢ )
=
,

0RDlNAlVT1HTYAPPRoA# .
 Indifferently
yn
It refers to the graphical
representation of various
alternative combinations

buddies of two
which the
goods
consumer is
of
among
u§^
I
.

-
"",
↑ ↑, , >

indifferent .
,
hood ✗
,

Scheck
Y

Combination of Apples Bananas n

Apples 2 Bananas
÷
{
" "
p 1 ☐ A
" -

On 2 10 B if
R 3 6 oɧ6 a .

-
*
s D
4 3 3
-

T 5 '
◦ : : ; ; !?
Apples
 MRS 1 Marginal Rate of substitution )
in
IC
slope of
change
sacrifice
-

to toss
Unit of Goody willing
%
=

MRS ✗ y profit
= ,

to
willing
-

Unit of Good ✗ gain

the rate at which commodities be

refers to can
-

Jt
substituted with eachother ,
so that the total
satisfaction
remains the same C Tear coffee )
of the consumer .

banana )
-

l
apple a

Indifference Map y n higwstatisfaction

g
- 0

Ics
-

family of
represent consumer Icy
%
-
that
bundles
preferences over all the ICs

of two goods .

jar
-

higher
IC represent higher >
level of satisfaction as higher 0
d✗ ✗
g. •

bundles of
IC represent large
which means more utility
goods
because of monotonic preference .
 Monotonic Preference refers to those preferences in

consumer always prefers

the bundle having
which
,

◦ either more of both the

goods ,
or

◦ more of at least one

good and same of the other
good .

en : -
1ˢᵗ ( lox , to B) 2 2nd 17A ,
7 B)
en : -

, 2 2nd 19A ,
>B)

Assumptions of IC .

1) Two commodities
2) Ordinal Utility
MRS convex to the origin
Diminishing
:
3)
Consumer
4) Rational
5) Non satiety

let's study about

properties of
" "
Ic
 Y n

1) IC slopes downward
of

\
◦
In order to ↑se production -
to ↓ se a
hood ✗ we have
. o

a
production of Goody hence ,

negatively sloping
curve,
It ñ

thus downward . [ MRS ↓ ] ◦

Good ✗ ?

ya
2) Icñ convex to the

point of origin
.

Reason -

diminishing MRS §
>
0 ✗
Goody

yn
3) higher IC
represent
higher level of satisfaction

ÉÉ
large bundles of Good
will

ji
-

amount of
give large
satisfaction
-
monotonic preference
,
 '
4) IC can never intersect In
each other : As two IC
level
cannot represent same

of satisfaction they
intersect
,
cannot
& a.

qi !d¥
A 2B
IC ,
{ givessatisfaction }
= '
same >
Icar - Aec 0 ✗

A- Be A
- =L then Btc ( different Ic )

"
5) Ic never touches ✗ & Yanis n

Point OB on Yanis shows 0

0A
lonsvmption of Good ✗ and on

✗ anis shows
0 consumption of ai ↳

Goody .
This is not possible as zc ,

of
¥•É
IC is the combination
"

consumption of 2 goods .

◦
>✗
 Budget line

combinations of
Itis a
graphical representation of all possible
income and
two goods which can be purchased with
given
each combination is equal to
such that the cost of
prices >

Pnwme of the ↳ nsumor

Budget line
.

the money Af is

y n

12 -

A "

? ÷ attainable
←
to °

be purchased
B
& Non
combination
8- •
as

§ ↳ cannot
•
C
,
-

I than
!
'

are more in vom )

u p
they
-

money

"
2-
•
O -
R .
E

◦
: : : : É >
✗

hood ✗

Mmm of
""

Attainable
combination equator money
income
,.mn
,

Price Ratio / MR C-
Rate of
slope of Budget line is Imaginal
tonnage ]
MR C-
Pyg
=
 features
1) straight line
assuming the entire income is
spent .

IMRE )
slope of badge line (→
Ppg
=
2)

3) Negatively or downward sloping wave ( good ✗ ↑ Goody ↓ , )

line
Budget shift in

→
Due to Income of Duet change in
the consumer price of ✗ &Y
dnwme
Cased Increase in case 1) Change in
price of Good × : -

^
)
y A"
Rightward
Y
µpiuofhood✗↓*
↑
Ati
A

piptwod
§ shift
,

& "
,

swot
& §
,

± ,
'
\
,
Ñ leftward
> \
° B B' ✗ suit I
→ '
Good ✗

a←BsBz
-

>
.

Good ✗

( price of Good ✗
↑ se )
Case 2) Decrease in Income Case Change in
price of Goody
2)
Yn Yn
ed )
! "

,&ñ!iitµ;npoiie&ʰᵈ
A ↑ '

≥
% leftward
shift ≤
↓p
, ,

,
I ←
É ¥" "
←
oi , ☒

/
° >✗
Ba B > ×
° •
hood ✗
Good ✗

☒ "%•dy) seat

As ↑se in price of Good ✗ , The consumer now will buy

less of Good ✗ →
Budget line shift leftward IAB → AB , ]

As ↓ se price if Goody buy

The consumer now will more
in ,

line shift rightward IAB → Aba )

of Goody → Budget

As ↑se in
price of Goody f. Budget line shift leftward AB BF?
-

as consumer can now buy less of Goody .

As Good l Budget line shift rightward AB BE] -

price of
↓ se in Y

as consumer can now

buy more of Goody .
Consumer Equilibrium under IC Analysis / ordinal utility
Approach

It refers to a situation in which a consumer derives

with it
maximum
satisfaction ,
no intention to
change .

To determine consumer equilibrium ,

both the price
line & Indifference map are combined together .

↳ budget line

conditions : 1) MRS
__P¥
-

2) Budget line should be tangent to IC

IC should be convex to the origin .

MRS ↓
3)

y
n
IG I C2 IC3
, Icy IC
, ,

AB Budget line
ii.
2
it '

\
:c a c- =
Equilibrium point
"

%-y
,

& '
¥
-
i. as MRS ≥

' Icy
N - - - -

¥
MRS ↓
'

_ Ics → IC convex ,
1- -
IC 2

tangent
-
-
•
g- to
-

IC AB is
-

I
, →
-1cg
M > ✗
B
O
Good ✗