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Consumer

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Consumer s equilibrium in case of Single Commodity. (utility approach) Consumer s equilibrium refers to a situation wherein a consumer gets maximum satisfaction ... – PowerPoint PPT presentation

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Title: Consumer


1

Consumers Equilibrium
  • Consumers equilibrium in case of
  • Single Commodity.
  • (utility approach)

2
  • Consumers equilibrium refers to a situation
    wherein a consumer gets maximum satisfaction out
    of his given income at the given market price of
    commodities .He has no tendency to change this
    situation.
  • Two laws have been developed to explain
    consumers equilibrium.
  • i) The law of Diminishing Marginal Utility.
  • ii) The law of Equimarginal Utility.

3
  • Law of Diminishing Marginal Utility
  • 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.
  • Alfred Marshall

4
ASSUMPTIONS
  • Identical units
  • Consumption should be continuous.
  • Utility can be measured
  • A consumer should be rational.

5
  • Consumers equilibrium in case of a single
    commodity is attained when he is consuming only
    one commodity and the marginal utility of the
    product in terms of money is equal to its price.
  • Consumers equilibrium in case of a single
    commodity is attained when
  • price of product

6
  • Since it is difficult t compare MU of a good with
    its price ,therefore, MU of a good is first
    converted in terms of money by dividing MU of a
    good with MU of a rupee (MU of a rupee is the
    extra utility when an additional rupee is spent
    on purchase of other available goods.)

7
SCHEDULE
Units of oranges consumed MU (Utils) MU in terms of money (Rs) Price of oranges Profit (Rs)
1 2 3 4 5 6 16 14 10 6 2 0 8 7 5 3 1 0 1 1 1 1 1 1 7 6 4 2 0 -1
8
Graphical presentation of equilibrium.
y
MU
e
MUm
mu
o
x
Units of orange
9
  • The consumer will consume 5 units of oranges
    because the MU in terms of money is equal to the
    price of orange.

10
Indifference curve approach
  • Indifference curve shows different combination of
    goods that yield the same level of utility or
    satisfaction to the consumer.
  • Assumptions
  • (i) Rationality
  • (ii) Ordinality
  • (iii) Consistency of choice

11
Properties of Indifference curve
  • A higher IC offers a higher level of
    satisfaction.
  • ICs are concave to the origin, because MRS tends
    to diminish.
  • ICs are negatively sloped.
  • ICs never touch or intersect each other.

12
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13
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14
Equilibrium
  • Consumers equilibrium is struck when price line
    and IC are tangent to each other.
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