Class 11 Micro chap2 consumer's equilibrum (1).pptx

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1. A consumer buys goods and services for satisfaction of his wants His main aim is to get maximum satisfaction from spending his income on goods and services How to maximise satisfaction? Resources are limited. Wants are unlimited Chap 2 Consumer’s Equilibrium

2. Utility is the want satisfying power of a commodity . To measure utility in cardinal utility analysis ‘utils’ are used. Higher utility does not mean greater usefulness. Utility is subjective. What is utility ?

3. Total Utility (TU) It is the total satisfaction obtained from the consumption of all possible units of a commodity TUn =U1+ U2+U3---------+Un

4. Marginal Utility (MU) It is the additional utility derived from the consumption of one more unit of a given commodity. Mun =Tun-Tun-1 or TU= Σ MU MU= Δ TU/ Δ Q

5. Relationship between TU and MU Schedule Ice-cream consumed MU TU 1 20 20 2 16 36 3 10 46 4 4 50 5 50 6 -6 44

6. Relationship between TU and MU 1 TU increases(at a decreasing rate) with an increase in consumption of a commodity as long as MU is positive. (4 th unit of ice cream) 2 TU reaches maximum(curve stable) ,MU becomes zero.(5 th unit of icecream ). 3 TU starts falling ,MU becomes negative. (beyond 5 th unit) Phase 1 Positive MU , Phase 2 Zero MU, Phase 3 Negative MU

7. Law of DIMINISHING marginal utility( Dmu ) As we consume more and more units of a commodity the utility derived from each successive unit goes on decreasing

8. Assumptions of law of DMU Cardinal measurement of utility Monetary measurement of utility Consumption of reasonable quantity Continuous consumption No change in the quality Rational consumer Independent utilities MU of money remains constant Fixed income and prices Perfect Knowledge

9. Law of DMU Schedule Ice-cream consumed MU TU 1 20 20 2 16 36 3 10 46 4 4 50 5 0 (Point of Satiety) 50 6 -6 44

10. Diagram Law of DMU Rectangles shows level of satisfaction They become smaller and smaller with the increase in consumption

11. Consumer’s Equilibrium Equilibrium in economics means:- Position of no change It provides maximum benefit /satisfaction under given situation 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

12. Consumer’s equilibrium in two situations 1.Consumer spends entire income on a Single Commodity 2.Consumer spends entire income on Two Commodities Calculation of MU in terms of money. = MU in utils /MU of 1 rs (MUM) If MU =20 MUM=1 mu in terms of money = 20/1=20

13. Consumer’s Equilibrium in case of single commodity This is based on law of DMU All assumptions of the law of DMU is applicable here also. It states that a consumer purchasing a single commodity will be at equilibrium when he is buying such a quantity of that commodity ,which gives him maximum satisfaction.

14. Equilibrium condition (in case of single commodity) (1) Mux=PX Where, Mux=Expected marginal utility (MU) from each successive unit of good x PX=Price of good X (2) MU falls as the consumption increases.

15. Other conditions when consumer is not at Equilibrium In this situation consumer goes on consuming more goods as benefit is greater than cost. When he buys more of X his utility for good X (MUX) decreases due to law of DMU In this situation consumer Will reduce the consumption as cost is more than benefit and he has to maximise his satisfaction. In both conditions he will continue to consumption till MUX=PX MUX>PX MUX<PX

16. Schedule(Consumer’s equilibrium) single commodity Units of X Price ( Px ) MU(in utils ) MU in Rs (MUX) 1 util =1RS Diff b/w MUX and Px Remarks 1 10 20 20/1=20 20-10=10 MUX>PX 2 10 16 16 16-10=6 3 10 10 10 10-10=0 MUX=PX 4 10 4 4 4-10= -6 5 10 0-10= -10 MUX<PX 6 10 -6 -6 -6-10=-16

17. Diagram At point E ( 3 rd unit ) consumer is at equilibrium ( MUX=PX ) Before E ( 2 nd unit) (MUX>PX) After E ( 4 th unit) (MUX<PX)

18. Consumer’s equilibrium in case of two commodities This is also known as Equi -Marginal utility Law of substitution Law of maximum satisfaction Gossen’s second Law

19. Conditions for consumer’s equilibrium (Two commodity) According to this law the consumer gets maximum satisfaction when :- ( i ) R atios of MU of two commodities and their respective prices are equal i.e Mux/PX=MUY/ Py (ii) MU falls as the consumption increases (Law of DMU)

20. Other conditions When the consumer is not at e quilibrium ,their can be 2 conditions (1) MUX/PX > MUY/ Py (2) MUX/PX<MUY/PY

21. Explaination When MUX/PX > MUY/ Py in this case the consumer is getting more satisfaction (MU) in case of X than Y . So he will consume more of X good so his utility for x will decrease(Law of DMU). Till MUx / Px = MUy / Py When MUX/PX < MUY/ Py in this case the consumer is getting more satisfaction (MU) in case of X than Y . So he will consume more of X good so his utility for y will decrease(Law of DMU ). Till MUx / Px = MUy / Py

22. Diagram and explaination IF the consumer is consuming two goods X and Y Mux,PX and Muy,Py are the utilities of X and Y respectively He will be at Equilibrium at point e Where Mux/ Px = Muy / py

23. Answer the following 1 What is the difference between Cardinal and ordinal approach? 2Explain conditions of consumer’s equilibrium in case of single commodity with the help of diagram and schedule. 3What is the relationship between TU and MU?explain with the help of a schedule and diagram. 4How consumer will attain equilibrium in case of two commodities?Explain with the help of diagram.