Consumer's Equilibrium - Utility Analysis ( class 11 Micro Economics)

  1) Question 1 2) Question 2 3) Question 3 4) Question 4 Or we could have done by the method, where we checked  MU ₓ / Pₓ = MUₘ , i.e., the rupee worth of satisfaction the consumer actually gets (MU ₓ / Pₓ)  = to the rupee worth of satisfaction he expects (MU ₘ) . The answer is 12/4 (3)  = 3, which is same as the above method. 

  1)  Main formula: MU ₓ / MU ₘ = Pₓ        where MU ₓ = marginal utility of commodity x.            MUₘ = rupee worth of satisfaction.               Pₓ   = price of commodity x. when MU ₓ / Pₓ = MUₘ   this is the equilibrium condition , when the rupee worth of satisfaction the consumer actually get (MU ₓ / pₓ) is equal to the rupee worth of satisfaction that the consumer expect (MUₘ) 2) Working notes of above explanation: Purchase of a commodity by a consumer depends on three factors: 1) Price of the commodity. 2) Marginal (and total) utility of the commodity. 3) Marginal utility of money. Marginal utility of money refers to 'worth of a rupee' to a consumer. The consumer defines it in terms of utility that he derives from standard basket of goods that he can buy with a rupee. For example: If a rupee can buy 2 toffee , 1 pencil and a chewing gum, and if total utility f...

  1) under utility approach we have : single commodity approach and two commodity approach. In the next slide we will learn single commodity approach.

  1) Consumer's Equilibrium refers to a situation when a consumer gets maximum satisfaction by spending his income across different goods and services. Assumptions on Consumer's Equilibrium: i) Consumer behaves rationally, and aims at the maximisation of his satisfaction. ii) Utility can be expressed in cardinal numbers, like 1, 2, 3... iii) Utility of a commodity is not affected by by the consumption of other goods i.e., Utility is independent for a particular good. iv) Marginal Utility of money remains constant. Consumer's Equilibrium has two approaches: 1) Utility Approach (cardinal) - under utility approach we have a) Single commodity b) Two commodity 2) Indifference curve approach (ordinal)

  1)  Law of Diminishing marginal utility states that as more and more of standard units of a commodity are continuously consumed, marginal utility derived from every additional unit must decline. Two basic assumptions are: 1) Only standard units of the commodity are consumed. Like, a cup of tea (not a spoon of tea). 2) Consumption of the commodity is continuous. Not that one unit is consumed now, and the other in the evening or tomorrow. 2) Some more assumptions:

  1) Cardinal measurement of utility means that utility (satisfaction) can be measured in terms of cardinal numbers or units like 1,2 and 3. And the unit of measurement is called utils. Ordinal measurement of utility means that utility (satisfaction) can only be ranked (high or low); it cannot be expressed in terms of units like 1,2 and 3.