CONSUMER’S EQUILIBRIUM

{UTILITY ANALYSIS}

LEARNING OUTCOMES:

 What is Consumer’s Equilibrium?

 Concept of utility and its types.
 Law of diminishing marginal utility.
 In case of single commodity.
 In case of two commodities.
CONSUMER

A person or an institution (an economic agent) who buys goods and services for the
maximum satisfaction of his wants. He buys goods or services primarily for the
personal consumption and not for resale or for commercial purposes.
EQUILIBRIUM
It is the state of balance or rest. In other words, it is no change situation.

CONSUMER’S EQUILIBRIUM

It is a situation where consumer attains maximum satisfaction with minimum

budget or given income.
A rational consumer will purchase a commodity up to the point where the price of
the commodity is equivalent to the marginal utility obtained from the thing.
{ Rational consumer: who is mentally sound, able to take proper decision, not
under the effect of intoxication, wants max satisfaction , stops consumption after
negative MU }
UTILITY
It refers to want satisfying power of the commodity. It is measured in UTILS.
Utility can also be measured in terms of money or price which a consumer is
willing to pay.
APPROACHES TO STUDY CONSUMER’S BEHAVIOUR
CARDINAL APPROACH TO UTILITY:
This concept was given by Prof. Alfred Marshel. It refers to the measurement of
utility in terms of standard numerical like 1, 2, 3 etc. Under this approach the unit of
measurement of utility is Utils. Higher the value higher would be the satisfaction
level. E.g.Height is measured in cms, water in ltr. , similarly Utility (satisfaction) is
measured in Utils.

ORDINAL APPROACH TO UTILITY:

This concept was given by J.R. Hicks. It refers to the measurement of utility in
terms of psychological satisfaction on consuming one good in comparison to other.
It is expressed in terms of ranks I.e. Consumers will give his preference whether he
likes the product or not and how much.

TYPES OF UTILITY:
 TOTAL UTILITY: It refers to aggregate (sum) utility derived from the
consumption of all the units of the commodity.
TU= MU1 + MU2+………….+ MUn OR TU=ƩMU (Sum of MU)
 MARGINAL UTILITY: The utility derived from the consumption of an
additional unit of a commodity is termed as Marginal utility.
MU= TUn - TUn-1 OR MU=△TU/△Q

RELATIONSHIP BETWEEN TU AND MU:

1. When MU is Decreasing but remains positive , TU rises at diminishing rate.
2. When MU is zero, TU is maximum and constant.
3. When MU becomes negative , TU starts falling.

(Satiety - state of being completely full )

LAW OF DIMNISHING MARGINAL UTILITY (DMU):

This law states that as more and more standard units of a commodity are
continuously consumed, the marginal utility obtained from each successive unit
goes on diminishing.
It is also known as Fundamental Psychological law or Gossen’s first law of
consumption as it was given by Prof.Gossen.

ASSUMPTIONS TO THE LAW

 Consumer must be rational I.e. he should be able to take wise and sound
decision. He should be mentally sound and should not be under the effect of any
substance/ intoxicant . He should have perfect knowledge.
 Fixed income and price.
 Same quantity and quality.
 Cardinal measurable. (Monetary measurement of utility)
 Continuous consumption.
 Consumption of reasonable quantity. E.g a glass of water rather than a spoon of
water.
TABULAR PRESENTATION:
APPLE TU MU

0 0 0

1 10 10

2 18 8

3 24 6

4 28 4

5 28 0 (point of satiety)

6 24 -4

SUMMARY:
CONSUMER’S EQUILIBRIUM:
 Equilibrium means a state of rest or a position of no change.
 A consumer is said to be in equilibrium when he does not intend to change his
level of consumption, I.e. point when he attains maximum satisfaction.
 Consumer’s equilibrium refers to a situation when a consumer is having
maximum satisfaction with limited and given income and has no tendency to
change his way of existing expenditure.