Faced with this constraint, demand theory assumes that the goal of the consumer is to select that combination of goods, in line with his preferences, that will maximize his total utility or satisfaction. Q Explain the following :- a Indifference set b Indifference Curve c Indifference Map A a Indifference set is a set of two commodities which offers the consumer same level of satisfaction, so that he is indifferent between these combinations. Proof of the Law: The Law of Equi-marginal Utility can be proved as follows- Let us suppose that a person has Rs. So, the doctrine of maximum satisfaction can be deduced from this law. The possibility of concavity cannot be ruled out in some exceptional cases. Convexity of indifference curve implies the marginal rate of substitution of X for Y decreases.
In figure 1, horizontal axis measures commodity X and vertical axis measure commodity Y. But as income increases marginal utility of money falls. But at the same time concavity implies increasing marginal rate of substitution of X for Y. Clearly the loss is greater than the gain. But, their discussion is beyond the scope.
So, a rational consumer aims to balance his expenditure in such a manner, so that he gets maximum satisfaction with minimum expenditure. Slope of the indifference curve shows the marginal rate of substitution of X for Y. Table also reports the ratio of the consumer's marginal utility to the price of each good. The Law of Equi-marginal Utility or the Principle of Substitution follows from the Law of Diminishing Marginal Utility. Here we are confronted with the basic conflict between preferences and the prices of the commodities consumer wants to consume.
He would not take combination R or N on a lower indifferences curve I 1 because combination K or T is also available to him on a higher indifference curve l 2. In our example, the equilibrium quantity can be calculated as -0. Therefore, marginal utility in utils is expressed in terms of money. The possibility of concavity cannot be ruled out in some exceptional cases. Every consumer has an individual willingness to pay for a specific product. In this case we have r 50 and the price of good X and good Y is r 10 and r 5 respectively.
Two little words, very different meanings. This is the main theme of the theory of consumer behavior. In such cases the law does not hold. You can learn in a different post. Very important, 6 marks Meaning of Consumer equilibrium:- It is a situation in which a consumer is satisfied and he has no tendency to change his pattern of consumption.
In indifference curve analysis, this occurs where the budget line is tangent to the highest reachable indifference curve. The condition for consumer equilibrium can be extended to the more realistic case where the consumer must choose how much to consume of many different goods. The consumer will purchase quantities of goods 1 and 2 so as to completely exhaust the budget for such purchases. In these cases consumer will choose only one of two goods, depending on his scale of preference and level of satisfaction between good x and good y. Being a rational consumer, he will be at equilibrium when marginal utility is equal to price paid for the commodity. Similarly you can have 10 units of good Y with the same 50 rupees.
Samulson- Principles of Economics 4. For two goods, X and Y, total utility is maximized when: Consumer equilibrium can also be depicted graphically using analysis. Let us suppose that a consumer has Rs. Suppose, total money income of the consumer is Rs. A consumer is said to be in equilibrium, when he does not intend to change his level of consumption, i. A further increase in income causes a further outward shift in the price line to L 2M 2. Combination P or Q is out of question for in either case he would have only Y or only X.
The ordinal approach defines two conditions of consumer equilibrium: Necessary or First Order Condition and Supplementary or Second Order Condition. As applied in production, this principle is known as the Law of Equi-marginal Returns. The is the difference between the highest price a consumer is willing to pay and the actual market price of the good. Equilibrium means a state of rest or a position of no change. I am going to my home. Consumer surplus is infinite when the demand curve is inelastic and zero in case of a perfectly elastic demand curve. Consumer equilibrium introduction class 12 microeconomics consumer's through indifference curve analysis what is consumer in economics? The consumer attains a stable equilibrium position where he is able to consume the most preferred combination which gives him highest utility.
There are other limitations too. Application of the Principle: The principle of substitution applies to production also. It is also noted that consumer is not tangent to the indifference curve at point A. This means that the willingness of the consumer to trade one good for the other is exactly the same as the ability to trade the two goods in the market. Q Explain the following :- a Indifference set b Indifference Curve c Indifference Map A a Indifference set is a set of two commodities which offers the consumer same level of satisfaction, so that he is indifferent between these combinations.