CONSUMER EQUILIBRIUM - MICRO ECONOMICS CLASS 11 COMMERCE - Kalindi Chokshi

CONSUMER EQUILIBRIUM 

(Utility Analysis)

1. UTILITY is the want-satisfying power of a commodity.

2. TOTAL UTILITY is the sum total of the utilities derived from the consumption of different units of a commodity.

3. MARGINAL UTILITY is additional utility when a unit more of a commodity is consumed.

MEASUREMENT OF UTILITY:

-Cardinal Measurement of Utility refers to the measurement of utility in terms of units like 2, 4, 6 and 8

-Ordinal Measurement of Utility refers to ranking of utility, comparing or expressing the utility in terms of higher, lower or equal to level of satisfaction across different situation.

RELATIONSHIP BETWEEN TU AND MU :

1.When MU diminishes, TU tends to increase at a diminishing rate.

2.When MU is zero, TU is maximum.

3.When MU is negative, TU starts 

diminishing.

LAW OF DIMINISHING MARGINAL UTILITY:

It states that marginal utility tends to diminish as more and more (standard) units of a commodity are (continuously) consumed by a consumer.

CONSUMER EQUILIBRIUM refers to situation when a consumer gets maximum satisfaction by spending his given income across different goods and services.

 

ASSUMPTIONS of Consumer’s Equilibrium :

1.Consumer behaves rationally, and aims at the maximum of his satisfaction.

2 Utility can be expressed in cardinal numbers, like 1, 2, 3...

3. Utility of a commodity does not get affected by the consumption of other goods.

4Marginal utility of money remains constant. 

CONDITIONS of Consumer’s Equilibrium : 

Rupee worth of satisfaction should be the same across all goods purchased by the consumer and equal to the marginal utility of the money.

Marginal utility of money remains constant.

Law of diminishing marginal utility hold good.

PRINCIPAL LIMITATION of Utility Analysis relates to its basics assumption that utility can be expressed in terms of cardinal numbers like 1, 2, 3.

- KALINDI CHOKSHI.

NOTE: The author does not claim the content. It has been made on PRIMARY research and studies.