Consumers Equilibrium and Demand
Consumers Equilibrium and Demand
Consumers Equilibrium and Demand
Consumer’s Equilibrium
Utility:
known as utility.
(a) Cardinal Utility Analysis
1 25 30
2 20 26
3 15 15
4 10 2
5 0 0
As per the above table the consumer gets
maximum satisfaction when he purchases 3
units of commodity X and Y respectively. It is
bacause MUx = MUy.
In this situation total utility is maximised.
(30+26+25+20+15+15 = 131) No other
combination of X and Y offer the consumer
higher than 131 utility.
Criticism Of Marginal Utility Analysis
• Utility-not measurable:
• Maximise satisfaction
• There must be continuity in the consumption
• Man is not rational: This theory assumes that a consumer can
calculate the utilities and dis utilities of different commodities
and buys only those commodities which gives maximum
utility
• The mental condition of the consumer should remain normal
during the consumption period
• Quality of the commodity remains uniform
(b) Ordinal Utility Analysis
(Modern economists, J.R. Hicks, and R.G.D. Allen)
A 1 10 Z
B 2 7 Z
C 3 5 Z
D 4 4 Z
Criticisms
• The Consumer is not Rational:
• Combinations are not based on any Principle:
• Two-Goods Model Unrealistic:
• Wrong assumption: The consumer’s tastes, habits and
income remain the same throughout the analysis.
• Wrong assumption: He prefers more of X to less of Y or
more of Y to less of X.
• Indifference Map
A group of Indifference curves are known as
Indifference map. Higher the indifference
curve shows higher the level of satisfaction.
• Marginal Rate of Substitution (MRS)
2. An Indifference curve is convex to the origin:
It is because of diminishing marginal rate of
substitution. That is as the curve moves
downward, the rate at which ‘Y’ is given up for X
is going on decreasing.
3. Higher Indifference curve shows higher level
of satisfaction:
Higher the indifference curve shows higher
level of the satisfaction. It means if an IC is
very much far away from the origin, it shows
higher level of satisfaction.
4. An Indifference curve never intersects each other:
(a) Budget Line/Price line
Budge line shows that combinations of two
goods that a consumer can purchase with a given
amount of money income.
Budget line can be explained with the help of an
imaginary example;
Suppose that the consumer has income equal
to Rs.200/- to spend on two commodities i.e.
cloth and food.
The price of cloth is Rs.40 per unit and the price
of food is Rs.20/- per unit.
Combinations Cloth Food
(Rs.40 Per Meter) (Rs. 20 per unit)
A 5 0
B 4 2
C 3 4
D 2 6
E 1 8
F 0 10
Change or Shift in Budget line
(a) When the income increases: