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    Consumers Equilibrium

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    ananthanvaikom
    The document discusses consumer equilibrium in economics. It explains that a consumer is in equilibrium when they derive maximum satisfaction from purchases and cannot rearrange purchases to be better off. It uses indifference curves and a budget line on a graph to show that consumers will seek to purchase the highest indifference curve possible given their budget. The point where the budget line is tangent to the highest indifference curve represents the consumer's equilibrium.

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    Consumers Equilibrium

    Uploaded by

    ananthanvaikom
    8 views8 pages
    The document discusses consumer equilibrium in economics. It explains that a consumer is in equilibrium when they derive maximum satisfaction from purchases and cannot rearrange purchases to be better off. It uses indifference curves and a budget line on a graph to show that consumers will seek to purchase the highest indifference curve possible given their budget. The point where the budget line is tangent to the highest indifference curve represents the consumer's equilibrium.

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    The document discusses consumer equilibrium in economics. It explains that a consumer is in equilibrium when they derive maximum satisfaction from purchases and cannot rearrange purchases to be better off. It uses indifference curves and a budget line on a graph to show that consumers will seek to purchase the highest indifference curve possible given their budget. The point where the budget line is tangent to the highest indifference curve represents the consumer's equilibrium.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    8 views8 pages

    Consumers Equilibrium

    Uploaded by

    ananthanvaikom
    The document discusses consumer equilibrium in economics. It explains that a consumer is in equilibrium when they derive maximum satisfaction from purchases and cannot rearrange purchases to be better off. It uses indifference curves and a budget line on a graph to show that consumers will seek to purchase the highest indifference curve possible given their budget. The point where the budget line is tangent to the highest indifference curve represents the consumer's equilibrium.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 8

    Consumers Equilibrium

    • A consumer is in equilibrium when he derives maximum satisfaction


    from the goods and is in no position to rearrange his purchases.
    Assumptions
    • There is a defined indifference map showing the consumer’s scale
    of preferences across different combinations of two goods X and Y.
    • The consumer has a fixed money income and wants to spend it
    completely on the goods X and Y.
    • The prices of the goods X and Y are fixed for the consumer.
    • The goods are homogenous and divisible.
    • The consumer acts rationally and maximizes his satisfaction.
    • In order to display the combination of two goods X and Y, that the
    consumer buys to be in equilibrium, let’s bring his indifference
    curves and budget line together.
    • We know that,
    • Indifference Map – shows the consumer’s preference scale between
    various combinations of two goods
    • Budget Line – depicts various combinations that he can afford to buy
    with his money income and prices of both the goods.
    • In the following figure, we depict an
    indifference map with 5
    indifference curves – IC1, IC2, IC3, IC4, and
    IC5 along with the budget line PL for
    good X and good Y.
    •
    From the figure, we can see that the
    combinations R, S, Q, T, and H cost the
    same to the consumer. In order to
    maximize his level of satisfaction, the
    consumer will try to reach the highest
    indifference curve. Since we have
    assumed a budget constraint, he will be
    forced to remain on the budget line.
    • If he chooses the combination R. From Fig. 1, we can see that R lies on a
    lower indifference curve – IC1. He can easily afford the combinations S, Q,
    or T which lie on the higher ICs. Even if he chooses the combination H, the
    argument is similar since H lies on the curve IC1 too.
    • Next, let’s look at the combination S lying on the curve IC2. Here again, he
    can reach a higher level of satisfaction within his budget by choosing the
    combination Q lying on IC3 – higher indifference curve level. The argument
    is similar for the combination T since T lies on the curve IC2 too.
    • Therefore, we are left with the combination Q.
    • This is the best choice since Q lies on his budget line and pts puts him on
    the highest possible indifference curve, IC3. While there are higher curves,
    IC4 and IC5, they are beyond his budget. Therefore, he reaches the
    equilibrium at point Q on curve IC3.
    • at this point, the budget line PL is tangential to the indifference curve IC 3.
    Also, in this position, the consumer buys OM quantity of X and ON quantity
    of Y.
    Marginal Utility
    • Marginal Utility analysis helps us understand the behavior of a
    consumer by looking at the way he spends his income on different
    goods and services to attain maximum satisfaction.
    • Total Utility or Full Satiety – is the sum of utility derived from
    different units of a commodity consumed by a consumer. Therefore,
    Total Utility = the sum total of all marginal utility.
    • Marginal Utility or Marginal Satiety – is the additional utility derived
    from the consumption of an additional unit of a commodity.
    Therefore, Marginal Utility = the addition made to the Total Utility by
    consuming one more unit of a commodity.
    The Law of Diminishing Marginal Utility
    • This is an important law under Marginal Utility Analysis. Alfred
    Marshall, British Economist defines the law of diminishing marginal
    utility as follows:
    • “The additional benefit which a person derives from a given increase
    in the stock of a thing diminishes with every increase in the stock that
    he already has.”
    • This law is based on the fundamental tendency of human
    nature. Human wants are virtually unlimited. However, every single
    want is satiable. Hence, as we consume more and more units of a
    good, the intensity of our want for the good decreases. Eventually, it
    reaches a point where we no longer want it.

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