sgoi notes chap 1 consumers equilibrium

SGOI_Notes_Chap 1_ Consumer’s Equilibrium Utility: The wants satisfying power of a good is called utility. Total utility: It is the sum total of utility derived  MU of all the units of a commodity.

 TU n  TU n 1

 MU  

TU 

from the consumption

Q

Marginal utility: It refers to an additional utility gained on account of the consumption of an additional unit of a commodity.

Quantity 0 1 2 3 4 5 6 7

MU 10 8 5 2 1 0 -3

TU 0 10 18 23 25 26 26 23

Relationship between TU & MU 1. As more and more units of a commodity are consumed, marginal utility derived from each successive unit tends to diminish. 2. So long as MU is i s +ve, TU increases. 3. TU is maximum when MU = 0. 4. TU starts declining when MU is  –ve. Law of Diminishing Marginal Utility: It states that as more and more units of a commodity are consumed M.U. derived from every additional unit must decline. It is also called fundamental law of satisfaction or fundamental psychological law. Assumption of Law a. Every unit must be standard

b.

Consumption must be continuous.

Consumer’s Equilibrium: The consumer is in equilibrium when, given his income and

market

prices he plans his expenditure in such a manner that he maximizes his total satisfaction. Consumer’s equilibrium in case of 1 commodity c ommodity The consumer equilibrium depends on 3 factors 1. Price of the commodity. commodity. 2. Marginal and total utility of commodity. 3. M.U. of money.

 price  P  x  MU

 MU  x

 MU mu

 P x



 MU x  MUm

MU m



MU x P x

 MU m

Indifference Curve: It is a curve that shows different sets of combination between two commodities that offer a consumer the same level of satisfaction. Indifference Map: The graphical representation of more than one indifference curve is known as indifference map. Assumption of IC 1. I.C. is always downward sloping from left to right because of law of marginal rate of transformation. 2. No IC curves intersect each other. Budget Line: - It is a line showing different possible combinations of a good 1 and good 2 that a consumer can buy, given his budget and the prices of good 1 and good 2.