Consumer Behaviour And Consumer Equilibrium

Consumer Behaviour &
Consumer Equilibrium
ECONOMICS SEMINAR ( GROUP-6)

Consumer Behaviour & Equilibrium
01 02
Consumer
Behaviour
Consumer
Equilibrium
CONSUMER BEHAVIOUR
Meaning
of
Utility
Meaning
of
Utils
Concept of
TU & MU
Relationship
between TU
& MU
Meaning
of
DMU
Meaning
of
IC
Features
of
IC
Law
of
DMRS
Budget
Line
Indifference
Map

Meaning of Utility:
The Want Satisfying Power Of A Commodity Is Termed As ‘Utility’.
Meaning of Utils:
The Unit Of Measuring Consumer’s Satisfaction Is Termed As ‘Utils’
Meaning of Total Utility (TU)
TU (Total Utility) Refers To The Total Satisfaction Derived From
Consumption Of A Commodity.
TU = ∑MU
Meaning of Marginal Utility (MU)
MU (Marginal Utility) Refers To Addition In TU Due To One
Additional Unit Of Consumption Of The Commodity.
MU = TUn – TUn-1

Relationship Between TU & MU
Units TU MU
1 10 10
2 18 8
3 24 6
4 28 4
5 30 2
6 30 0
7 28 -2
1. When TU increases at a
diminishing rate, MU falls
2. When TU is maximum, MU
is zero (0).
3. When TU falls, MU
becomes negative.
4. MU is derived from TU.

LAW OF DIMINISHING MARGINAL UTILITY
According to this Law: “As a consumer consumes more & more units of a
commodity, MU derived from additional units goes on falling i.e., the utility derived
from each successive unit falls.”
Assumptions of LAW of DMU:
1. Cardinal measurement of Utility
2. The consumer is rational
3. Continuous consumption
4. MU of rupee remains constant
5. Fixed income & price

Indifference Curve
An indifference curve is a graph showing combination of two goods that give the consumer
equal satisfaction and utility. Each point on an indifference curve indicates that a consumer is
indifferent between the two and all points give him the same utility.
It shows how many units of
clothing is the consumer
willing to give up
in exchange for an additional
unit of food so that his level of
satisfaction remains
unchanged.
Combin
a-tion
Food Clothing
A 1 12
B 2 6
C 3 4
D 4 3

Indifference Map
An Indifference Map is a set of Indifference Curves. It depicts the complete picture of a
consumer’s preferences. It is important to note that the consumer prefers the combinations on
the higher indifference curves to those on the lower ones.
A higher indifference curve implies a higher
level of satisfaction. Therefore, all
combinations on IC1 offer the same
satisfaction, but all combinations on IC2 give
greater satisfaction than those on IC1.

Properties of Indifference Curve
1. Indifference Curve slopes downwards towards the
right.
(Monotonic Preferences)
2.Indifference Curve is always convex to the
origin.
(Law of Diminishing Marginal Rate of Substitution)
3. Higher Indifference Curve indicates higher level
of satisfaction
4. Two Indifference Curves never intersect each
other.

LAW OF DIMINISHING MARGINAL RATE OF SUBSTITUTION
• Marginal rate of substitution means the rate at which a consumer will sacrifice
the successive units of one good for a marginal increase in another good.
• This law states that the rate of substitution goes on diminishing due to which the
Indifference Curve is convex.

Budget Line
The Budget Line, which is also known as Budget Constraint, is a graphical
representation of all the combinations of two commodities that a customer can
manage to afford at the provided market prices and within the particular earning
degree.
It is identical to the real income line of
the customer.
It is a negatively sloped straight line.
Budget Line Equation is given by:-
M = Px × Qx + Py × Qy

Consumer’s
Equilibrium
A consumer is said to be
in equilibrium when he
maximizes his satisfaction at
a given income and prices
of the commodities.
Two approaches are used to know how much of a commodity should a consumer
buy. These are:
1. Utility approach
2. Indifference curve approach

Utility Approach: In Case of Single Commodity
Units of
goods (X) MU(x)
Price of
good (x)
1 8 5
2 6
3 5 5
4 4 5
5 3 5
MUx = Px
A consumer purchasing a single commodity will be at equilibrium, when he
is buying such a quantity of that commodity, which gives him maximum
satisfaction.

Utility Approach: In case of Double Commodity
According to a two commodity case a consumer will so allocate his expenditure
so that the utility gained from the last rupee spent on each commodity is equal.
It is derived as : MUx / Px = MUy / Py

Indifference Curve Approach
Under the indifference curve approach, the point of maximum satisfaction is
achieved by studying indifference map and budget line together. The consumer’s
equilibrium must meet the following two conditions:
i) (MRS)xy = PX/PY
ii) MRS continuously falls

Consumer Behaviour And Consumer Equilibrium

More Related Content

What's hot

Similar to Consumer Behaviour And Consumer Equilibrium

Recently uploaded

In this document

Consumer Behaviour And Consumer Equilibrium