MICRO-ECONOMICS

CONSUMER
A CONSUMER IS ONE WHO BUYS GOODS AND SERVICES FOR SATISFACTION OF WANTS.
 Cardinal Utility
Approach /Marginal Utility
Approach
Ordinal Utility Approach
/Indifference Curve Analysis

UTILITY
 It refers to want satisfying power of a commodity.

TOTAL UTILITY
MARGINAL UTILITY
It is an additional unit of utility derived from consumption of one more unit of commodity.In other
words, It is the utility derived from each additional unit.
Relation between total utility and marginal
utility
UNITS MU TU

1 10 10

2 8 18

3 6 24

4 4 28

5 2 30

6 0 30

7 -2 28
 1. When Mu diminishes but positive Tu increases at a diminishing rate.
2. When Mu is zero, Tu is maximum.
3. When Mu is negative, Tu diminishes.

Law of Diminishing Marginal Utility (DMU):

ASSUMPTION OF LAW OF DIMINISHING MARGINAL
UTILITY.
CONSUMER EQUILIBRIUM
CONSUMER’S EQUILIBRIUM IN CASE OF
SINGLE /ONE COMMODITY
CONSUMER’S EQUILIBRIUM IN CASE OF TWO
COMMODITY
CONDITIONS
INDIFFERENCE CURVE
MONOTONIC PREFERENCE
INDIFFERENCE MAP
MARGINAL RATE OF SUBSTITUTION
MARGINAL RATE OF SUBTITUTION
ASSUMPTION OF INDIFFERENCE CURVE
PROPERTIES OF INDIFFERENCE CURVE
BUDGET LINE
A graphical representation of all those bundles which can be purchased with given income and prices,
such that the cost of each of these combination is equal to the money income of the consumer.

BUDGET SET
It is quantitative combination of those bundles which a consumer can purchase from his given income at
prevailing market prices.

PROPERTIES OF BUDGET LINE

  Negative Slope: It slopes downward showing an inverse relationship between the buying of
the two goods.
 Straight Line: It is a straight line which denotes the constant market rate of exchange at each
combination.
 Real Income Line: It functions on the principle of income and the spending capacity of a
consumer.
 Tangent to Indifference Curve: The indifference curve touches the budget line at a point,
and this point is known as the consumer’s equilibrium.

SHIFT IN BUDGET LINE

N RIGHTWARD SHIFT IS DUE TO INCRESE IN INCOME

LEFTWARD SHIFT IS DUE TO DECREASE IN INCOME

EFFECT OF CHANGE IN PRICES
CHANGE IN PRICES OF X-AXIS

Rightward rotation of x axis is due to reduction in prices

Left ward rotation of x axis is due to increase in prices

CHANGE IN PRICES OF Y AXIS

Upward rotation of y axis is due to decrease in prices

Leftward rotation of y axis is due to increase in prices.

Condition of Consumer’s Equilibrium
CARDINAL UTILITY APPROACH
 Units MUx MUy MUx/Px MUy/Py

1 36 40 12 10

2 33 36 11 9

3 30 32 10 8

4 27 28 9 7

5 24 24 8 6

6 21 20 7 5

Assumption, Px = Rs.3, Py = Rs.4

Y = Rs.20 Here, MUm = 9

 ORDINAL UTILITY APPROACH
(b) Ordinal approach (Indifference Curve Analysis): According to this approach utility cannot be measured but can
be expressed in order or ranking.
Condition of Equilibrium:

1.
or budget line must be tangent to indifference curve.
2. MRS must be diminishing or,
Indifference curve must be convex to the origin
CARDINAL UTILITY AND ORDINAL UTILITY