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Consumer equilibrium

Answer» Consumer’s Equilibrium : A consumer is said to be in equilibrium when he maximizes his satisfaction, given his money income and prices of two commodity. He attains equilibrium at that point where the slope of IC is equal to the slope of budget line.Condition of Consumer’s Equilibrium(a) Cardinal approach (Utility Analysis) : According to this approach utility can be measured. “Utils” is the unit of utility.Condition(i) In case of one communityWhere, MUm = Marginal utility of moneyMUx = Marginal utility of ‘x’, Px = Price of ‘x’(ii) In case of two commodity.xy and MU must be decreasingunits\tMUx\tMUy\tMUx/Px\tMUy/Py1\t36\t40\t12\t102\t33\t36\t11\t93\t30\t32\t10\t84\t27\t28\t9\t75\t24\t24\t8\t66\t21\t20\t7\t5Assumption, Px= Rs.3Py=Rs.4Y=Rs.20 Here, MUm= 9(b) Ordinal approach (Indifference Curve Analysis): According to this approach utility cannot be measured but can be expressed in order or ranking.Condition of Equilibrium:(i)or budget line must be tangent to indifference curve.(ii) MRS must be diminishing or,Indifference curve must be convex to the origin.Quantity Demanded : It is that quantity which a consumer is able and is willing to buy at particular price and in a given period of time.Determinants of Demand:a). Price of Goodb). Income of Consumersc). Taste & Preference of Consumerd). Change in Price of Related Goodse). Future Expectation to Change in priceChange of Demand :a) Change in quantity Demanded or Movement along Demand curveb) Change in Demand or Shift in DemandMarket Demand :It is the total quantity of the commodity demanded in the market by all consumers at different prices at a point of time.Demand Function :It is the functional relationship between the demand for a commodity and factors affecting demand.


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