, CONSUMER EQUILIBRIUM
INTRODUCTION
A consumer is generally understood as an individual) But in reality, consumer consists
of individuals or group of individuals or institutions.
The aim of this chapter is to make you understand: How does a consumer maximize his
satisfaction from consumption of goods and services.
The two main approaches to study consumer's behaviour and consumer's equilibrium
are:
Cardinal Utility Approach (or Marshall's Utility Analysis or Marginal Utility Analysis)
Ordinal Utility Approach (or Indifference Curve Analysis or Hickson Analysis)
UTILITY: It refers to satisfaction derived from the consumption of a commodity or
“want-satisfying power of a commodity.
CARDINAL UTILITY APPROACH
People consume different goods and services in order to maximise the satisfaction
level. However, to do this, it is necessary to determine quantum of satisfaction
obtained from a particular commodity.
Total utility (TU)
Total utility refers to the total satisfaction obtained from the consumption of all
possible units of a commodity
TU can be calculated as: Tun = U1+U2+U3 or TU=ΣMU
Do Consider it
1. The utility derived from the first unit of a commodity is known as initial utility.
For example: Utility of 20 utils from the first ice-cream is termed as the initial
utility.
2. Total utility is zero at zero level of consumption
Marginal Utility (MU)
It refers to additional utility an account of consumption of an additional unit of a
commodity.
MU can be calculated as: Mun =TUn-TUn-1 or MU = Change in Total Utility = TU
Change in number of units Q
Ice-cream consumed Marginal utility (MU) Total Utility (TU)
1 20 20
2 16 20+16=36
3 10 20+16+10=46
4 4 20+16+10+4=50
5 0 20+16+10+4+0=50
6 -6 20+16+10+4+0+(-6)=44
INTRODUCTION
A consumer is generally understood as an individual) But in reality, consumer consists
of individuals or group of individuals or institutions.
The aim of this chapter is to make you understand: How does a consumer maximize his
satisfaction from consumption of goods and services.
The two main approaches to study consumer's behaviour and consumer's equilibrium
are:
Cardinal Utility Approach (or Marshall's Utility Analysis or Marginal Utility Analysis)
Ordinal Utility Approach (or Indifference Curve Analysis or Hickson Analysis)
UTILITY: It refers to satisfaction derived from the consumption of a commodity or
“want-satisfying power of a commodity.
CARDINAL UTILITY APPROACH
People consume different goods and services in order to maximise the satisfaction
level. However, to do this, it is necessary to determine quantum of satisfaction
obtained from a particular commodity.
Total utility (TU)
Total utility refers to the total satisfaction obtained from the consumption of all
possible units of a commodity
TU can be calculated as: Tun = U1+U2+U3 or TU=ΣMU
Do Consider it
1. The utility derived from the first unit of a commodity is known as initial utility.
For example: Utility of 20 utils from the first ice-cream is termed as the initial
utility.
2. Total utility is zero at zero level of consumption
Marginal Utility (MU)
It refers to additional utility an account of consumption of an additional unit of a
commodity.
MU can be calculated as: Mun =TUn-TUn-1 or MU = Change in Total Utility = TU
Change in number of units Q
Ice-cream consumed Marginal utility (MU) Total Utility (TU)
1 20 20
2 16 20+16=36
3 10 20+16+10=46
4 4 20+16+10+4=50
5 0 20+16+10+4+0=50
6 -6 20+16+10+4+0+(-6)=44
