Microeconomics
Class - XI
Consumer's Equilibrium and Demand – Notes
Who is a consumer?
The person who takes decisions about what to buy for the satisfaction of wants both as an individual
and as a member of a household is called a consumer.
A rational consumer
A consumer who seeks to maximize utility or satisfaction by spending his income on goods and
services is a rational consumer.
Meaning of Utility
Utility refers to the satisfaction, actual or expected, derived from consumption of a good.
Utility differs from person-to-person, place-to-place and time-to-time.
Total Utility (TU)
Total utility refers to the total satisfaction obtained from the consumption of all
possible units of a commodity.
It measures the total satisfaction obtained from consumption of all the units of that good .
TU = U1 +U2 + U3 +………..UN where U1 is the utility derived from the
first unit of the good, U2 from the second,
U3 from the third and so on.
Marginal Utility (MU)
Marginal utility is the additions to total utility when one more unit of the commodity is
consumed. It is the utility derived from the last unit of a commodity consumed.
TU = MU1 + MU2 + MU3+…….+ MU N
TU =𝜮MU
MU N = TU N - TU N-1
MU is the rate of change in TU when one more unit is consumed or MU = ∆TU/∆Q
➢ Area under the MU curve is TU
Law of Diminishing Marginal Utility
Law of Diminishing Marginal Utility states that as the consumer consumes more and more units of
a commodity the additions to total utility (i.e marginal utility) derived from each successive unit
consumed keeps on decreasing.
Assumptions of Law of Diminishing Marginal Utility
1. Cardinal utility: It is assumed that utility or satisfaction can be measured cardinally and
expressed in quantitative terms i.e. in utils.
2. It is assumed that consumption is a continuous process.
3. The consumer is rational.
4. Income and prices of the goods remain unchanged during the period of consumption.
Utility Schedule
Units of X good Marginal Utility from X (Utils)
1 10
2 8
3 7
4 5
5 3
6 0
7 -1
1
, The marginal utility from each unit of X keeps on declining as the consumer increases his
consumption from 1 unit to 7 units. MU is falling but positive from 1 st unit till the 5 th unit.
At the 6 th unit the additions to total utility (MU) is zero. After the 6 th unit, there is negative
utility or disutility from any more units consumed.
Relation Between Total Utility (TU) and Marginal Utility (MU)
Units of Marginal Utility Total Utility
Ice Cream (Utils) (Utils)
1 20 20
2 17 37
3 10 47
4 6 53
5 0 53
6 -5 48
TU max.
TU falls
• When MU decreases but is positive,
TU increases TU increases at decreasing rate. (From 0 till
at decreasing
the 4th unit)
rate
• When MU becomes zero, TU is
maximum.(at the 5th unit) This is called the
MU falls Point of Satiety
but > 0
• When MU decreases and is negative,
Point of Satiety TU falls. (after the 5th unit)
MU =0
Consumer’s equilibrium – It refers to a situation when a consumer spends his income on the
purchase of a good (or combination of goods) in such a way that gives him maximum satisfaction
and he feels no urge to change.
Utility or Cardinal approach (It is assumed that utility or satisfaction can be measured cardinally
and expressed in quantitative terms i.e. in utils.)
Conditions for consumer’s equilibrium
Assumptions:
1. The consumer is rational.
2. It is assumed that utility or satisfaction can be measured and expressed in quantitative terms
i.e. in utils.
3. Price of the good and income of the consumer is fixed.
• Single good case : When the consumer consumes only one good X.
Condition 1:
MUx = Px
(Marginal utility of X in terms of money equals price of the good X)
2
, Case 1: If MUx > Px then Marginal utility in terms of money is greater than the price of the good.
• Benefit received from the last unit consumed is more than cost for that unit, hence the
consumer will consume more of good X.
• As he consumes more of X, MUx declines (due to Law of DMU).
• This continues till MUx = Px and equilibrium is attained.
Case 2: If MUx < Px then Marginal utility in terms of money is less than the price of the good.
• Benefit received from the last unit consumed is less than cost for that unit, hence, the
consumer will consume less of good X.
• As he consumes less of X, MUx rises (due to Law of DMU).
• This continues till MUx = Px and equilibrium is attained.
Condition 2: Law of Diminishing Marginal Utility should hold true.
• Two goods case : When the consumer consumes two goods X and Y
(Law of equi-marginal utility)
MUx = MUy
Condition 1: Px Py
(MU from last rupee spent on X equals MU from last rupee spent on of Y)
Case 1: If MUx > MUy
Px Py
It means MU from last rupee spent on X is greater than MU from last rupee spent on Y.
• The consumer prefers good X to good Y.
• He will consume more of X and less of Y since income and prices are fixed.
• Due to Law of Diminishing Marginal Utility, MUx falls and MUy rises.
• This continues till MUx = MUy and equilibrium is restored.
Px Py
Case 2: If MUx < MUy
Px Py
It means MU from last rupee spent on X is less than MU from last rupee spent on Y.
• The consumer prefers good Y to good X.
• He will consume less of X and more of Y since income and prices are fixed.
• Due to Law of Diminishing Marginal Utility, MUx rises and MUy falls.
• This continues till MUx = MUy and equilibrium is restored.
Px Py
Condition 2: Law of Diminishing Marginal Utility should hold true.
If it does not hold true and MUx > MUy, then the consumer will end up spending all his income
Px Py
only on one good X and none on Y which is unrealistic and breaks the two-good assumption.
Cardinal Utility Vs Ordinal Utility
1. Under cardinal utility approach, it is assumed that utility can be measured in cardinal or
quantitative terms. According to ordinal approach, utility cannot be measured, and we
can just rank the consumer’s preferences.
2. Under cardinal approach, the term ‘util’ was developed as a unit to measure utility,
whereas no such unit of measurement was developed under ordinal approach.
3
Class - XI
Consumer's Equilibrium and Demand – Notes
Who is a consumer?
The person who takes decisions about what to buy for the satisfaction of wants both as an individual
and as a member of a household is called a consumer.
A rational consumer
A consumer who seeks to maximize utility or satisfaction by spending his income on goods and
services is a rational consumer.
Meaning of Utility
Utility refers to the satisfaction, actual or expected, derived from consumption of a good.
Utility differs from person-to-person, place-to-place and time-to-time.
Total Utility (TU)
Total utility refers to the total satisfaction obtained from the consumption of all
possible units of a commodity.
It measures the total satisfaction obtained from consumption of all the units of that good .
TU = U1 +U2 + U3 +………..UN where U1 is the utility derived from the
first unit of the good, U2 from the second,
U3 from the third and so on.
Marginal Utility (MU)
Marginal utility is the additions to total utility when one more unit of the commodity is
consumed. It is the utility derived from the last unit of a commodity consumed.
TU = MU1 + MU2 + MU3+…….+ MU N
TU =𝜮MU
MU N = TU N - TU N-1
MU is the rate of change in TU when one more unit is consumed or MU = ∆TU/∆Q
➢ Area under the MU curve is TU
Law of Diminishing Marginal Utility
Law of Diminishing Marginal Utility states that as the consumer consumes more and more units of
a commodity the additions to total utility (i.e marginal utility) derived from each successive unit
consumed keeps on decreasing.
Assumptions of Law of Diminishing Marginal Utility
1. Cardinal utility: It is assumed that utility or satisfaction can be measured cardinally and
expressed in quantitative terms i.e. in utils.
2. It is assumed that consumption is a continuous process.
3. The consumer is rational.
4. Income and prices of the goods remain unchanged during the period of consumption.
Utility Schedule
Units of X good Marginal Utility from X (Utils)
1 10
2 8
3 7
4 5
5 3
6 0
7 -1
1
, The marginal utility from each unit of X keeps on declining as the consumer increases his
consumption from 1 unit to 7 units. MU is falling but positive from 1 st unit till the 5 th unit.
At the 6 th unit the additions to total utility (MU) is zero. After the 6 th unit, there is negative
utility or disutility from any more units consumed.
Relation Between Total Utility (TU) and Marginal Utility (MU)
Units of Marginal Utility Total Utility
Ice Cream (Utils) (Utils)
1 20 20
2 17 37
3 10 47
4 6 53
5 0 53
6 -5 48
TU max.
TU falls
• When MU decreases but is positive,
TU increases TU increases at decreasing rate. (From 0 till
at decreasing
the 4th unit)
rate
• When MU becomes zero, TU is
maximum.(at the 5th unit) This is called the
MU falls Point of Satiety
but > 0
• When MU decreases and is negative,
Point of Satiety TU falls. (after the 5th unit)
MU =0
Consumer’s equilibrium – It refers to a situation when a consumer spends his income on the
purchase of a good (or combination of goods) in such a way that gives him maximum satisfaction
and he feels no urge to change.
Utility or Cardinal approach (It is assumed that utility or satisfaction can be measured cardinally
and expressed in quantitative terms i.e. in utils.)
Conditions for consumer’s equilibrium
Assumptions:
1. The consumer is rational.
2. It is assumed that utility or satisfaction can be measured and expressed in quantitative terms
i.e. in utils.
3. Price of the good and income of the consumer is fixed.
• Single good case : When the consumer consumes only one good X.
Condition 1:
MUx = Px
(Marginal utility of X in terms of money equals price of the good X)
2
, Case 1: If MUx > Px then Marginal utility in terms of money is greater than the price of the good.
• Benefit received from the last unit consumed is more than cost for that unit, hence the
consumer will consume more of good X.
• As he consumes more of X, MUx declines (due to Law of DMU).
• This continues till MUx = Px and equilibrium is attained.
Case 2: If MUx < Px then Marginal utility in terms of money is less than the price of the good.
• Benefit received from the last unit consumed is less than cost for that unit, hence, the
consumer will consume less of good X.
• As he consumes less of X, MUx rises (due to Law of DMU).
• This continues till MUx = Px and equilibrium is attained.
Condition 2: Law of Diminishing Marginal Utility should hold true.
• Two goods case : When the consumer consumes two goods X and Y
(Law of equi-marginal utility)
MUx = MUy
Condition 1: Px Py
(MU from last rupee spent on X equals MU from last rupee spent on of Y)
Case 1: If MUx > MUy
Px Py
It means MU from last rupee spent on X is greater than MU from last rupee spent on Y.
• The consumer prefers good X to good Y.
• He will consume more of X and less of Y since income and prices are fixed.
• Due to Law of Diminishing Marginal Utility, MUx falls and MUy rises.
• This continues till MUx = MUy and equilibrium is restored.
Px Py
Case 2: If MUx < MUy
Px Py
It means MU from last rupee spent on X is less than MU from last rupee spent on Y.
• The consumer prefers good Y to good X.
• He will consume less of X and more of Y since income and prices are fixed.
• Due to Law of Diminishing Marginal Utility, MUx rises and MUy falls.
• This continues till MUx = MUy and equilibrium is restored.
Px Py
Condition 2: Law of Diminishing Marginal Utility should hold true.
If it does not hold true and MUx > MUy, then the consumer will end up spending all his income
Px Py
only on one good X and none on Y which is unrealistic and breaks the two-good assumption.
Cardinal Utility Vs Ordinal Utility
1. Under cardinal utility approach, it is assumed that utility can be measured in cardinal or
quantitative terms. According to ordinal approach, utility cannot be measured, and we
can just rank the consumer’s preferences.
2. Under cardinal approach, the term ‘util’ was developed as a unit to measure utility,
whereas no such unit of measurement was developed under ordinal approach.
3
