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

1) Utility Approach - Two commodities   2) Example 1 3) Example 2 4) If Consumer is not in Equilibrium Solution: 5) Question

  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.

  1) Total Utility is the sum total utility derived from the consumption of all the units of a commodity. For example: If 2 units of a commodity are consumed and 1st unit yields satisfaction of 10 utils, while the 2nd unit yields satisfaction of 9 utils, then Total Utility ( TU) = 10+9                                                                                    = 19 utils (or 19 units of utility). 2) Relationship between Total Utility and Marginal Utility is explained with the help of total utility curve 1) TU increases so long as MU is +ve. 2) TU is maximum when MU is 0. 3) TU starts declining when MU is -ve. 4) Decreasing MU implies that TU increases at a decreasing rate (MU is the rate of TU). Diminishing MU implies that TU will increase only at diminishing rate . Be...

  1) For example if 10 units of a commodity yields satisfaction of 100 utils, and 11 units of a commodity yields satisfaction of 105 utils, then additional utility on account of the consumption of 11th unit of the commodity is 105 - 100 => 5 utils. This is called marginal utility. Thus, marginal utility (MU) is measured as under: MUₙ  = TU ₙ - TUₙ₋₁ So for the above example: MU = TU₁₁ - TU₁₀ [ total utility from 11 units-total utility from 10 units]    = 105 utils - 100 utils    = 5 utils 2) TU=MU    when only 1 unit of commodity is consumed.

  1) 2)   Utility refers to satisfaction derived from the consumption of a commodity. Or Utility refers to the want-satisfying power of a commodity. 3) It refers to additional utility on account of consumption of an additional unit of a commodity. Basically it means that if we consume 1 unit of a commodity and derive satisfaction from it and then we consume 1 more additional unit we will derive some from satisfaction from it. That additional satisfaction/utility  which we get from the consumption of that 1 additional unit of commodity is known as Marginal Utility.