Micro Economics Class XI: Consumer Equilibrium

Key Concepts

• Consumer: An economic agent using goods/services for direct satisfaction of wants.
• Consumer Behavior: Allocation of limited income for maximum satisfaction.
• Utility: Satisfaction from consuming a commodity.
  • Cardinal Measurement: Utility is ranked but not quantifiable in units.
  • Total Utility (TU): Sum of satisfaction from all units consumed.
  • Marginal Utility (MU): Additional satisfaction from consuming one more unit.

Relationship between TU & MU

1. MU positive: TU increases.
2. MU zero: TU is maximum or constant.
3. TU = sum of MU.
4. MU curve is the slope of the TU curve.
5. MU = Change in TU / Change in Quantity.

Law of Diminishing Marginal Utility (DMU)

• As more units of a commodity are consumed, MU from each additional unit declines.
• Assumptions of DMU:
  1. Utility can be numerically measured.
  2. Utility can be measured in monetary terms.
  3. Continuous consumption.
  4. Constant quality.
  5. Fixed income and prices.
• Exceptions: Hobbies, music, poetry.

Concept of Consumer Equilibrium

• Consumer's Equilibrium: Maximum satisfaction with no urge to change consumption level.
• Single Commodity Equilibrium: Occurs when MUx = Px.
  • If MUx > Px: The consumer is not in equilibrium; continues buying until MU = Px.
  • If MUx < Px: The consumer reduces consumption until MU = Px.
• Two Commodities Equilibrium: Allocation of income between two goods.
  • Equi-marginal utility: MUx/Px = MUy/Py = Mum.

Ordinal Utility Analysis

• Consumption Bundle: Combination of two goods (e.g., X1, X2).
• Budget Set: All purchasable bundles with given income and prices.
• Budget Line: Represents affordable bundles at given prices.
  • Features:
    1. Straight line if entire income is spent.
    2. Slope depends on budget of both goods.
    3. Downward sloping curve.
    4. Increase in consumption of one, implies increase of the other.
    5. Slope = Price ratio of goods (P1/P2).

Changes in Budget Line

1. Shifts:
   • Forward (income increases, constant prices).
   • Backward (income decreases, constant prices).
2. Rotation:
   • Rightward rotation if Px or Py falls.

Indifference Curve Analysis

• Indifference Curve (IC): Represents combinations of goods with equal satisfaction.

Properties of IC

1. Downward sloping: More units of one good require fewer units of another for same satisfaction.
2. Convex to origin: Due to Marginal Rate of Substitution (MRS = Change in X / Change in Y).
3. Rightward IC indicates higher satisfaction.
4. ICs do not intersect.
5. ICs do not touch axes.

Marginal Rate of Substitution (MRS)

• Willingness to replace one good with another while maintaining satisfaction.
• Used in indifference theory to analyze consumer behavior.