Consumer Equilibrium

Soumendra Roy

UTILITY
EXPECTED
SATISFACTION
DERIVED FROM THE
CONSUMPTION OF A
GOOD
PSYCHOLOGICAL
PHENOMENA
DIFFERS
FROM
CONSUMER
TO
CONSUMER
MEASURED IN UTILS

TWO TYPE OF UTILITY

TOTAL
UTILITY

MARGINA
L UTILITY

Sum total of satisfaction that the consumer

It derives
means when
addition
a certain
to the
nu

Assumptions of
the
Utility Approach

Utility can be cardinally

measurable, i.e. can be expressed
in exact units;
Utility is measurable in monetary
terms;
Consumers income is given;
Prices of commodities are given &
constant;
Constant Marginal Utility of Money

LAW OF DIMINISHING
MARGINAL UTILITY
As a consumer goes on coming more and more
units of a commodity the additional benefit that
he derives from the additional unit of a
commodity goes on falling
Quantity

Marginal
utility ( in
Rs.)

MUx

Consumer Equilibrium
It refers to a situation under
which a consumer spends his
entire income on purchase of a
good in such a manner that gives
him maximum satisfaction and
he has no tendency to change it.

Condition of Consumer
Equilibrium
MUx \ Px =MUm
where,MUx = Marginal Utility of
Product x
Px = Price of x
MUm = Marginal Utility of money
MUx = MUm * Px ty of Money
Marginal Utility of the good =
Utility of Price paid

UTILITY SCHEDULE
OF A CONSUMER

Graphical Presentation
Price,
Utilit
y
Consumers
Equilibrium One
Commodity
Quantity

CASE OF A
SINGLE COMMODITY
For the consumer
Utility obtainedBenefit.
Price PayableCost.
A consumer will continue to consume additional
units of a commodity till the point where his
marginal utility (in terms of money ) is greater
than or equal to the price of the commodity.
Being a rational consumer he wouldnt pay
more price for a product that gives him lesser
sati

LOCATING CONSUMER
EQUILIBRIUM

Consumer Equilibrium under Indifference Curve Analysis

I. Introduction to Indifference curve analysis
II. Assumptions to equilibrium of the consumer
III. Indifference Map and Budget Line of consumer
IV. Consumers Equilibrium or Maximization of Satisfaction
V. First and Second order condition for consumer
equilibrium.
VI. Income Effect: Income consumption Curve
a) ICC of Normal Good
b) ICC of Luxury Goods
c) ICC of Inferior good
VII.Conclusion

Consumer Equilibrium under Indifference Curve Analysis

1. Introduction to Indifference curve analysis

Consumer Equilibrium under Indifference Curve Analysis

1. Introduction to Indifference curve
analysis

Ordinal means- Can be compare with each other- 1St , 2nd ,

3rd etc.
Ordinal Utility analysis - Utility can compare but can not
be measure.
Popularized by J.R. Hicks and R.G.D. Allen
Used the tool named Indifference Curve
Known as Indifference curve approach of utility
analysis

Consumer Equilibrium under Indifference Curve Analysis

1. Introduction to Indifference curve
analysis
Assumptions Indifference Curve Analysis

a) Consumer is rational or Rationality

b) Utility is ordinal
c) Consistence in choice
If A > B, then never become B > A

4. Consumers Preference is Transitive:

If A > B and B > C, then A > C
5. Diminishing Marginal Substitution of goods:
6. Dependent Utility
7. A Large bundle of goods preferred to small bundle

Consumer Equilibrium under Indifference Curve Analysis

II. Assumptions to explain equilibrium of the consumer

Consumer Equilibrium under Indifference Curve Analysis

II. Assumptions to equilibrium of the consumer

To Explain the consumers equilibrium the following assumption

is there

1. The consumer has Indifference Map of good X and Good

Y
2. The consumer have a fixed money income which are
spend on X and Y
3. The Prices of good X Px and good Y Py are given
4. Good are homogenous

Consumer Equilibrium under Indifference Curve Analysis

III. Indifference Map and Budget Line of consumer

Consumer Equilibrium under Indifference Curve Analysis

III. Indifference Map and Budget Line of consumer

A graph showing a whole set of indifference curves is called an

indifference map. An indifference map, in other words, is
comprised of a set of indifference curves. Each successive curve
further from the original curve indicates a higher level of total
satisfaction.

Consumer Equilibrium under Indifference Curve Analysis

III. Indifference Map and Budget Line of consumer
A budget line or price line represents the various combinations of
two goods which can be purchased with a given money income and
assumed prices of goods".
Income (Y)= 60
Price of Biscuit (Px)
=6
Y

Price of Coffee(Py)
=
12
Combinat
Biscuit
ion

Coffee

10

Consumer Equilibrium under Indifference Curve Analysis

IV. Consumers Equilibrium or Maximization of Satisfaction

Consumer Equilibrium under Indifference Curve Analysis

IV. Consumers Equilibrium or Maximization of
Satisfaction

"The termconsumers equilibriumrefers to the amount of goods

and services which the consumer may buy in the market given his
income and given prices of goods in the market, that give
maximum satisfaction to consumer".

The aim of the consumer is to get maximum satisfaction from his

money income. Given theprice line or budget lineand
theindifference map:

Consumer Equilibrium under Indifference Curve Analysis

IV. Consumers Equilibrium or Maximization of
Satisfaction
"The termconsumers equilibriumrefers to the amount of goods and
services which the consumer may buy in the market given his income and
given prices of goods in the market".
The aim of the consumer is to get maximum satisfaction from his money
income. Given theprice line or budget lineand theindifference map:

Consumer Equilibrium under Indifference Curve Analysis

IV. Consumers Equilibrium or Maximization of
Satisfaction
"Aconsumer is said to be in equilibriumat a point where the price
line is touching the highest attainable indifference curve from
below"

Consumer Equilibrium under Indifference Curve Analysis

IV. Consumers Equilibrium or Maximization of
Satisfaction
"Aconsumer is said to be in equilibriumat a point where the price
line is touching the highest attainable indifference curve from
below"

Consumer Equilibrium under Indifference Curve Analysis

IV. First order and Second order condition for consumer

Equilibrium

Consumer Equilibrium under Indifference Curve Analysis

IV. First order and Second order condition for consumer
Equilibrium
Thus the consumers equilibrium under the indifference curve theory must
meet the following two conditions:
First order condition :A given price line
should be tangent to an indifference curve
or marginal rate of satisfaction of good X for
good Y (MRSxy) must be equal to the price
ratio of the two goods. i.e.
MRSxy= Px/ Py
Slop of IC = Slop of Budget Line
Second order condition :The second
order condition is that indifference curve
must be convex to the origin at the point of

Consumer Equilibrium under Indifference Curve Analysis

IV. First order and Second order condition for consumer
Equilibrium
First
order condition : Necessary Condition
(1) Budget Line Should be Tangent to the
A given price line should be tangent to an indifference curve or marginal
Indifference Curve:
rate of satisfaction of good X for good Y (MRSxy) must be equal to the price
ratio of the two goods. i.e.
MRSxy= Px/ Py
Slope of the Price Line to be Equal to the Slope of Indifference
Curve:

Price of X / Price of Y = MRS of X for Y

Slop of Budget Line = Slop of IC

Consumer Equilibrium under Indifference Curve Analysis

IV. First order and Second order condition for consumer
Equilibrium
Second order condition : Sufficient Condition
The second order condition is that indifference curve must be convex to
the origin at the point of tangency.
Indifference Curve Should be Convex to the Origin at
the point of Tangency

Consumer Equilibrium under Indifference Curve Analysis

V. Income Effect: Income consumption Curve

a) ICC of Normal Good
b) ICC of Inferior good
c) Luxury good

Consumer Equilibrium under Indifference Curve Analysis

V. Income Effect: Income consumption Curve

TheIncome effectineconomicscan be defined as the change in

consumption resulting from a change in real income.

If the prices of goods, tastes and preferences of the consumer remains

constant and there a change in his income, it will directly affect
consumers demand. This effect on the purchase due to change in
income is called theincome effect.

Consumer Equilibrium under Indifference Curve Analysis

V. Income Effect: Income consumption Curve

The Income Consumption Curve show how income effect on the

quantity consumed of the good

Consumer Equilibrium under Indifference Curve Analysis

V. Income Effect: Income consumption Curve

If the prices of goods, tastes and preferences of the consumer remains

constant and there a change in his income, it will directly affect consumers
demand. This effect on the purchase due to change in income is called
theincome effect.

Consumer Equilibrium under Indifference Curve Analysis

V. Income Effect: Income consumption Curve
a) ICC of Normal Good

Consumer Equilibrium under Indifference Curve Analysis

V. Income Effect: Income consumption Curve
a) ICC of Inferior good

The good which is purchased less with the increase in income is

calledinferior good.

Wheat is
inferior

Rice is
inferior

Consumer Equilibrium under Indifference Curve Analysis

V. Income Effect: Income consumption Curve

ICC - good X is
Inferior and
good Y is
Normal

Good Y

ICC - good Y is
inferior and
good X is
Normal
Good X

Consumer Equilibrium under Indifference Curve Analysis

V. Income Effect: Income consumption Curve

ICC - good X is
necessity and
good Y is
Luxury

Good Y

ICC - good Y is
necessity and
good X is
Luxury
Good X