Date : 25.5 2020
Dear students
Let us now go straight into the Consumers Equilibrium
How to determine Consumer's Equilibrium
In this blog i shall be explaining the determination of Consumer's Equilibrium through the Cardinal Approach
The Cardinal approach determines CE in terms of a number.
Consumer's Equilibrium refers to a situation when a consumer is having maximum satisfaction with limited income and has no tendancy to change his way of existing expenditure
A rational consumer aims to balance his expenditure in such a manner , so that he gets maximum satisfactionwith minimum expenditure.
Consumer's Equilibrium can be discussed under two different situations
1. Consumer spends his entire income on a Single Commodity
2. Consumer spends his entire income on two Commodities.
Consumer Equilibrium in case of Single Commodity
A consumer purchasing a single commodity will be at equilibrium , when he is buying such a quantity of that commodity , which gives him maximum satisfaction.
There are 2 factors which depend on the number of units to be consumed
1 Price of the given commodity
2. Expected utility ( Marginal utility) from each successive unit
While purchasing a commodity, a consumer compares its price with expected utility from it.He will buy the commodity as long as MU> Price
But how much or how many units of the commodity he would buy depends on the following condition
MUx/MUm= Price This is the general condition of CE in a single commodity case .
It means that MU of a commodity ( when measured in monetary units) must be equal to Price.
The problem though is that MUx is calculated in UTILS while Price is measured in monetary terms . To get rid of this we convert MUx in UTILS in terms MUin Rs. This is done by the following formula MUx/MUm.
MUm is utils derived from Re1.. Say Re1 gives the consumer 5 UTILS then MUm is 5
In the given schedule below Marginal utility of money is given as 4 utils and Price is given as Rs 20
The schedule explains how many units of Ice cream a consumer would consume to achieve Consumer Equilibrium
In the above Schedule the consumer is at equilibrium when he consumes 3 Ice Creams because at this point his MUx ( in monetary terms is equal to Price of the commodity).
According to the General condition MUx/MUm= Price .
80/4 = 20 which is at the 3rd unit that the consumer is at equilibrium.
Double Commodity case : CE in purchase of 2 commodities is attained when MUx=MUy ie. MUof goodX = MU of good Y
CE in 2 commodities is when consumer spends his limited income in such a way that MU of both commodities are equal i.e. utility derived from last rupee spent on each good is equal assuming price of each good to be equal ( different prices is not in your syllabus)
Let us understand it with an example
Income of consumer is Rs 5
Price of both goods GoodX and good Y is Re 1 each
How should he allocate his expenditure on both goods to maximise Total Utility for consumption
Now to see where the consumer maximises his satisfaction he spends the first rupee where he gets maximun Utility that is 10 utils the second rupee he spends where he gets 9utils the third ruoee he spends where he gets 8 utils the fourth rupee he spends where he gets 6 utils and the last rupee he has he spends where he gets 6 utils again.
If we add up the utilities derived we get ( 10+9+8+6+6 = 39 utils) No other combination of utils consumed will give him 39 utils so we can conclude that when the consumer consumes 3 units of good X and 2 units of good Y he will be at consumers equilibrium.
Please go through the video links given below to understand the topic explained better
https://www.youtube.com/watch?v=0JyVwZbXPMo
Dear students
Let us now go straight into the Consumers Equilibrium
How to determine Consumer's Equilibrium
In this blog i shall be explaining the determination of Consumer's Equilibrium through the Cardinal Approach
The Cardinal approach determines CE in terms of a number.
Consumer's Equilibrium refers to a situation when a consumer is having maximum satisfaction with limited income and has no tendancy to change his way of existing expenditure
A rational consumer aims to balance his expenditure in such a manner , so that he gets maximum satisfactionwith minimum expenditure.
Consumer's Equilibrium can be discussed under two different situations
1. Consumer spends his entire income on a Single Commodity
2. Consumer spends his entire income on two Commodities.
Consumer Equilibrium in case of Single Commodity
A consumer purchasing a single commodity will be at equilibrium , when he is buying such a quantity of that commodity , which gives him maximum satisfaction.
There are 2 factors which depend on the number of units to be consumed
1 Price of the given commodity
2. Expected utility ( Marginal utility) from each successive unit
While purchasing a commodity, a consumer compares its price with expected utility from it.He will buy the commodity as long as MU> Price
But how much or how many units of the commodity he would buy depends on the following condition
MUx/MUm= Price This is the general condition of CE in a single commodity case .
It means that MU of a commodity ( when measured in monetary units) must be equal to Price.
The problem though is that MUx is calculated in UTILS while Price is measured in monetary terms . To get rid of this we convert MUx in UTILS in terms MUin Rs. This is done by the following formula MUx/MUm.
MUm is utils derived from Re1.. Say Re1 gives the consumer 5 UTILS then MUm is 5
In the given schedule below Marginal utility of money is given as 4 utils and Price is given as Rs 20
The schedule explains how many units of Ice cream a consumer would consume to achieve Consumer Equilibrium
|
||||||||||||||||||||||||||||||||||||
In the above Schedule the consumer is at equilibrium when he consumes 3 Ice Creams because at this point his MUx ( in monetary terms is equal to Price of the commodity).
According to the General condition MUx/MUm= Price .
80/4 = 20 which is at the 3rd unit that the consumer is at equilibrium.
Double Commodity case : CE in purchase of 2 commodities is attained when MUx=MUy ie. MUof goodX = MU of good Y
CE in 2 commodities is when consumer spends his limited income in such a way that MU of both commodities are equal i.e. utility derived from last rupee spent on each good is equal assuming price of each good to be equal ( different prices is not in your syllabus)
Let us understand it with an example
Income of consumer is Rs 5
Price of both goods GoodX and good Y is Re 1 each
How should he allocate his expenditure on both goods to maximise Total Utility for consumption
Rupee Spent
|
MUx
|
MUy
|
1
|
10
|
9
|
2
|
8
|
6
|
3
|
6
|
4
|
4
|
4
|
2
|
5
|
2
|
1
|
Now to see where the consumer maximises his satisfaction he spends the first rupee where he gets maximun Utility that is 10 utils the second rupee he spends where he gets 9utils the third ruoee he spends where he gets 8 utils the fourth rupee he spends where he gets 6 utils and the last rupee he has he spends where he gets 6 utils again.
If we add up the utilities derived we get ( 10+9+8+6+6 = 39 utils) No other combination of utils consumed will give him 39 utils so we can conclude that when the consumer consumes 3 units of good X and 2 units of good Y he will be at consumers equilibrium.
Please go through the video links given below to understand the topic explained better
https://www.youtube.com/watch?v=0JyVwZbXPMo
KEVIN SUNIL PAPPAN 11B
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