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Consumer Equilibrium

This document discusses key concepts related to consumer equilibrium including: - Consumer equilibrium occurs when a person receives maximum satisfaction from their consumption. - Total utility is the satisfaction from consuming all units of a good, while marginal utility is the additional satisfaction from consuming one more unit. - Indifference curves and maps show combinations of goods that provide equal satisfaction. Higher indifference curves indicate greater satisfaction. - Consumer equilibrium is reached when the marginal utility per rupee spent equals the price for each good, or when the slope of the indifference curve equals the budget line slope. - Properties of indifference curves include being downward sloping, convex, never intersecting, and not touching price axes.

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100 views5 pages

Consumer Equilibrium

This document discusses key concepts related to consumer equilibrium including: - Consumer equilibrium occurs when a person receives maximum satisfaction from their consumption. - Total utility is the satisfaction from consuming all units of a good, while marginal utility is the additional satisfaction from consuming one more unit. - Indifference curves and maps show combinations of goods that provide equal satisfaction. Higher indifference curves indicate greater satisfaction. - Consumer equilibrium is reached when the marginal utility per rupee spent equals the price for each good, or when the slope of the indifference curve equals the budget line slope. - Properties of indifference curves include being downward sloping, convex, never intersecting, and not touching price axes.

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ovaisamjad720
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© © All Rights Reserved
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Chapter 2 Consumer Equilibrium

Q What do you mean by consumer equilibrium?


Ans - Consumer equilibrium is a situation in which a person gets maximum satisfaction.

Q What do you mean by utility?


Ans - Want satisfying power of any commodity is known as consumer equilibrium.

Q What is Total Utility?


Ans - It is the sum total of utility derived from the consumption of all units of a
commodity.

Q What is Marginal Utility?


Ans - it refers to additional utility on account of the consumption of an unit of a
commodity.

Q What is Budget line?


Ans - It refers to attainable combinations of sets of two commodity at given prices of
commodity and income of the consumer.

Q Explain the following :-


a) Indifference set
b) Indifference Curve
c) Indifference Map
Ans (a) Indifference set is a set of two commodities which offers the consumer same
level of satisfaction, so that he is indifferent between these combinations.
(b) Indifference Curve is the diagrammatic presentation of an indifference set. it shows
the set of two commodities that offers the consumer the same level of satisfaction, so
that he is indifferent between these combinations.
(c) Indifference Map refers to a set of indifference curve.
(d) Budget Set It refers to the set of all possible combinations of two goods which a
consumer can afford at given income and prices in the market.

Q Explain relation between MU and TU.


Q Explain Consumer Equilibrium in case of single commodity or one commodity.

Ans. Meaning of Consumer Equilibrium: - It is a situation in which a costumer is getting


maximum satisfaction and he has no tendency to change his pattern of consumption.
Condition: - MUX = PX

Schedule:- Suppose a consumer is buying orange and the price of each unit of orange
is rupee 4, hypothetical MU of orange is given as

Units MUX PUX


1 8 4
2 6 4
3 4 4
4 2 4

Explanation of schedule: - It is evident from the schedule that consumer will purchase
four oranges and reaches an equilibrium position.
In this situation the position of the consumer equilibrium MUX (in rupee) is equal to
PX is satisfied.

Diagram:-

Qus.
Explain consumer equilibrium in case of double commodity. Very important, 6 marks
Meaning of Consumer equilibrium:- It is a situation in which a consumer is satisfied and
he has no tendency to change his pattern of consumption.

Condition: - MUx = MUY = MUM


PX PY

Qus. Explain properties of an Indifference Curve or IC.


Ans.Here are the properties of an indifference curve:
Ans.
IC slopes downwards to the right
Indifference curves are negatively sloped It shows that more of one commodity implies
less of the other, so that total satisfaction remains the same.
IC is always convex to the origin
This is because of diminishing Marginal Rate of Substitution.
Indifference curves never intersect each other
Two ICs will never intersect each other. Also, they need not be parallel to each other
either. Look at the following diagram:

A higher IC indicates a higher level of satisfaction as compared to a lower IC


A higher IC means that a consumer prefers more goods than not.
An IC does not touch the axis
This is not possible because of our assumption that a consumer considers different
combinations of two commodities and wants both of them

7. Explain the conditions of consumer’s equilibrium under indifference curve


approach.
Ans. According to indifference curve analysis, consumer’s equilibrium is at a point
where the slope of, indifference curve is equal to the slope of budget line or price line.
Two conditions of the consumer’s equilibrium are.

(ii) At the point of equilibrium, indifference curve must be convex to the origin. It implies
that at the point of equilibrium, MRS must be diminishing.
P is the equilibrium point at which budget line touches the higher Indifference Curve
IC2 within the consumer budget

8. Explain the concepts of


(i) Marginal Rate of Substitution (MRS)
Ans. (i) Marginal Rate of Substitution refers to the rate at which the consumer is
willing to substitute one good to obtain one more unit of the other good. Symbolically,

This is the rate at which a consumer is prepared to exchange a good X for Y. If we take
Peter’s example above, we have the following table:
Combination Food Clothing MRS
A 1 12 –
B 2 6 6
C 3 4 2
D 4 3 1
In this example, Peter initially gives up 6 units of clothing to get an extra unit of food.
Hence, the MRS is 6. Similarly, for subsequent exchanges, the MRS is 2 and 1
respectively. Therefore, MRS of X for Y is the amount of Y whose loss can be
compensated by a unit gain of X, keeping the satisfaction the same.
Qus.
Prepared By

Rohitash Kumar
PGT Economics
KV No 1, Colaba

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