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Consumer equilibrium and demand
This document discusses concepts related to consumer equilibrium and demand. It defines key terms like utility, marginal utility, total utility, and how they are related. The law of diminishing marginal utility and how it impacts demand is explained. Two approaches to modeling consumer equilibrium are presented: the utility approach and indifference curve approach. Consumer equilibrium conditions and assumptions are outlined for both single and multiple goods. Factors that determine demand, the law of demand, and exceptions are also summarized. Elasticity of demand and its measurement are briefly introduced.
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Consumer equilibrium and demand
- 1. Consumer equilibrium and Demand S.MADAN KUMARM.A.,B.Ed.,M.Phil.,M.B.A.,
- 2. • Utility isthe power or capacity of a commodity to satisfy human wants . • Utility is subjective and cannot be measured quantitatively ,yet for convenience sake,it is measured in units of pleasure or utility called utils Utility
- 3. • Marginal utilityis the additional utility derived from consumption of an additional unit of a commodity • MUn=TUn-TUn-1 Marginal utility
- 4. • Total utilityis the sum of all the utilities derived from consumption of an additional unit of a commodity. • Relationship between Marginal and Total utility 1.TU increases so long as MU is more than zero 2.TU is maximum when MU is zero 3.TU starts declining when MU becomes negative. Total utility
- 5. Units of oranges consumed Marginalutility (utils) T0otal utility (utils) 0 - 0 1 10 10 2 8 18 3 5 23 4 2 25 5 6 7 1 0 -3 26 26 23 Relation between MU and TU
- 6. • As moreand more units of a commodity are consumed ,marginal utility derived from each successive unit goes on falling Law of diminishing Marginal Utility
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- 8. • Consumer’s equilibriummeans a situtation under which he spends his given income on purchase of a commodity in such a way that gives him maximum utility and he feels no urge to change Consumer’s Equilibrium
- 9. • Utility analysisapproach –Marshall-cardinal • Indifference curve approach-Prof.J.R.Hicks-Ordinal Two approaches of CE
- 10. • 1.Consumer’s equilibriumin case of a single commodity through utility approach MU of a product =price of product MU of a rupee 2.In case of two commodities MU x = MU y Condition of consumer’s equilibrium
- 11. • Marshall’s analysisis confined to a single good model whereas Hicks takes into account combination of two commodities and expresses ‘level of satisfaction’ instead of utility Consumer’s equilibrium through Indifference curves
- 12. • A combinationof amounts of two goods will b called a bundle. • The set of bundles available to the consumer is called budget set • Budget line is the graphic presentation of all the bundles which a consumer can actually buy with his entire income at the prevailing market prices Budget line
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- 14. • Slope ofBudget Line : it is negatively sloped ,the slope of budget line is equal to ratio of prices of two goods • Shift of Budget line: Consumer income • Budget constraint: consumer can afford to spend within his given income and prevailing prices
- 15. • An indifferencecurve is a curve which shows all those combination of two goods that give equal satisfaction to the consumer Indifference cure
- 16. • 1.indifference curvesalways slope down from left to right • 2.Higher indifference curves represents higher level of satisfaction. • 3.indifference curves are always convex to the origin because MRS of two goods continuously falls • 4.IC cannot touch or intersect each other Properties of IC
- 17. • The consumerbehaves rationally. • The consumer can rank bundles on the basis of satisfaction • Price of goods and income are given • A consumer’s preferences are monotonic( consumption of more quantity of a good means more satisfaction) Assumptions
- 18. • It measuresthe consumer’s willingness to pay for one goood in terms of the other good.it is because consumer’s preference for goods is such that he is willing to give up some amount of one good for an extra amount of the other without affecting his total utility MRS
- 19. • When marginalrate of substitution is equal to ratio of prices of two goods i.e MRS =Px/Py • MRS is continuously falling • Budget line should be tangent to indifference curve • Indifference curve should be convex to the point of origin. Consumer’s equilibrium under 4 conditions
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- 21. • In thegraph the equilibrium point at which budget line AB just touches the higher attainable IC2 within consumer budget at H .here both the conditions are filled simultaneously .mind ,bunddles on the higher IC3 are not affordable because his income does not permit whereas bundles on the lower IC1 gives lower level of satisfaction than at IC2.Hence the equ chice is only at the tangency point P
- 22. • Demand fora particular good by A consumer means the quantities of the good that he is willing to buy at different prices within a given period of time Demand
- 23. • Price ofcommodity • Prices of related good – substitute goods, complementary goods • Income of the consumer- a)Normal goods b)Inferior good • Tastes and preferences of the conumer Factors determining demand
- 24. • Other thingsbeing constant, quantity demanded of a commodity is inversely related to the price of the commodity Law of demand
- 25. Price of sugarper kg in Rs. Quantity Demanded Kg 20 2 16 3 12 4 8 4 5 6 Demand schedule- a tabular presentation of quantities demanded at different prices
- 26. Demand curve- graphical representationof demand schedule
- 27. • No changein the income of the consumer • No change in the taste ,preferences and habits of the consumer • No change in the number of family members ,weather etc., Assumption of law of demand
- 28. • • • • • • • Inferior goods orgiffen goods Goods expected to become scarce or costly in future Status symbol goods Fashion Necessities Emergency Future change in price Exceptions to the law of demand
- 29. • • • • • Law of diminishingmarginal utility Income effect Substitution effect Number of consumers Different uses of a commodity Why does demand curve sloping downward ?
- 30. • Expansion ofdemand- downward movement along a demand curve • Contraction of demand- upward movement along a demand curve the above changes occurs due to price • Increase in demand-rightward shift in demand curve • Decrease in demand-leftward shift in demand curve The above changes is due to other than price of commodity Change in demand
- 31. • Individual thequantity of a commodity which an individual is willing to buy at different prices in a given period of time • Market demand is the sum of demand by all buyers of a commodity at a given period Individual demand and market demand
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- 33. • Price elasticityof demand • Income elasticity of demand • Cross elasticity of demand Elasticity of demand
- 34. • • • • Perfectly inelastic demand–ed=0 Unit elastic demand – ed=1 inElastic demand- ed<1 Elatic demand- ed>1 Degree of price elasticity of demand
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