How is income allocated for satisfaction?
What is the optimum purchase of the consumer?
What happens if a good gives less marginal utility per rupee?
Why does the law of diminishing marginal utility hold?
Why does the law fail to operate?
What happens if the consumer has arranged his consumption so that every single good brings him marginal utility just exactly proportional?
What happens if MU is greater than price paid?
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1. Define consumer equilibrium?
Consumer equilibrium is a point at which a consumer’s derived utility from a commodity is at its maximum, given a fixed level of income and price o...
2. Explain the concept of consumer equilibrium?
Consumers derive utility from each commodity they consume. This utility is dependent on the price of a product. The point at which the marginal uti...
3. Define utility.
The utility is defined as the want satisfying power of goods. The more they need for the particular commodity or the strong desire to have it, the...
4. What does marginal utility mean?
Marginal utility or MU is the change in total utility due to the consumption of one additional unit of a commodity. For example, suppose 5 mangoes...
5. What does total utility mean?
Total utility or TU of a fixed quantity of a commodity is defined as the total satisfaction derived from consuming the given amount of some commodi...
What is Consumer Equilibrium?
A consumer is said to be in an equilibrium state when he feels that he cannot change his situation either by earning more or by spending more or by changing the number of things he buys. A rational consumer will purchase a commodity up to the point where the price of the commodity is equivalent to the marginal utility obtained from the thing.
What is the marginal utility of two or more commodities?
In the case of two or more commodities, the marginal utility derived from one commodity in proportion to its price should be equal to the marginal utility derived from a second commodity in proportion to its price.
What is MU1 in economics?
Here, MU1 is the marginal utility of commodity 1 and P1 is its price. If a consumer derives a higher MU/P from one commodity than the other, he/she will purchase more units of the former commodity from his/her given income than the latter until both MU/P components are equal.
What happens to marginal utility when the price is lower than the price?
Similarly, if the marginal utility of a product is lower than its price, a consumer would reduce his/her consumption until marginal utility climbs back to the fixed price level.
What would a rational consumer continue to purchase more or less of a commodity until such marginal utility derived from it?
A rational consumer would continue to purchase more or less of a commodity until such marginal utility derived from it meets the price of that commodity.
What is equilibrium level in consumer?
A consumer attains equilibrium at such level where marginal utility derived from the consumption of a commodity is equal to its one unit price.
What happens when a MU curve intersects the price level when moving downwards?
If an MU curve intersects the price level when moving downwards, a consumer will derive negative utility from any additional consumption beyond that point.
What is Consumer Equilibrium?
Consumer Equilibrium refers to a situation where the consumer has achieved the maximum possible satisfaction from the quantity of the commodities purchased given his/her income and prices of the commodities in the market.
What is the highest indifference curve that a consumer can attain at the given income level and market price of?
Therefore, the consumer is at equilibrium at point E. As the IC2 curve is tangent to the budget line AB, IC2 is the highest indifference curve that a consumer can attain at the given income level and market price of commodities. At point E, the consumer consumes quantities OQx of X and OQy of Y to yield maximum satisfaction. In Figure 1, when the consumer is at point J and moves to point M, there is no difference in the satisfaction level at both points that lie on the same curve IC1.
What is the curve PCC?
The curve PCC represents the Price Consumption Curve, which can be obtained by joining all equilibrium points C1, C2, C3, and C4.
What is the effect of income on consumer equilibrium?
Income effect on consumer’s equilibrium can be defined as the effect caused by changes in consumer’s income on his/her purchases while the prices of commodities remain unchanged. Figure 2 illustrates the effect of change in the consumer’s income on his/her equilibrium:
What is the substitution effect?
In such a case, the consumer would tend to purchase more units of commodity X and fewer units of commodity Y, which implies that the consumer substitutes commodity X for Y. This is known as the substitution effect. The substitution effect occurs because of the following:
What is the movement along the indifference curve from Q to Q1?
However, the indifference curve remains the same. This movement along the indifference curve from Q to Q1 is known as the substitution effect.
When does the equilibrium position of the consumer change to Q1?
Therefore, the new equilibrium position of the consumer changes to Q1 from Q when the price of a commodity changes. At Q1, the consumer cuts down the units of commodity Y from ON to ON1 and purchases more units of X, OM to OM1.
How is income allocated for satisfaction?
More precisely, for the maximisation of satisfaction, income must be allocated in such a way that the marginal utility of an unit of money’s worth (for example, one rupee’s worth) is the same for every commodity. If it is found that the marginal utility of the last unit of money spent on say, X commodity is greater than that derived from another commodity, say, Y commodity, he substitutes X for Y. Such a process of substitution goes on till the marginal utility of the last unit of money spent on X and on Y becomes equal to each other.
What is the optimum purchase of the consumer?
This law can also be explained in another way to show the optimum purchase of the consumer or the consumer’s equilibrium. A consumer buys a commodity up to that amount at which its price is equal to its marginal utility. In the case of purchase of many commodities, maximum satisfaction requires the allocation of income in such a way that the marginal utilities of units of various goods bought are proportional to their prices.
What happens if a good gives less marginal utility per rupee?
If any good gave less marginal utility per rupee than the common level, the consumer would buy less of it’s until the marginal utility of the last rupee spent on it had risen back to the common level. The Law of Equi-marginal Utility (or the Principle of Substitution) follows from the Law of Diminishing Marginal Utility.
Why does the law of diminishing marginal utility hold?
Why does this law hold? If any one good gave more marginal utility per rupee the consumer would gain by taking money away from other goods and spending more on that good — up to the point where the law of diminishing marginal utility brought its marginal utility per rupee down to equality. If any good gave less marginal utility per rupee than the common level, the consumer would buy less of it’s until the marginal utility of the last rupee spent on it had risen back to the common level.
Why does the law fail to operate?
The law may fail to operate in the cases where consumers or producers commit mistakes in calculating marginal utility of the commodity or marginal product of the factor of production.
What happens if the consumer has arranged his consumption so that every single good brings him marginal utility just exactly proportional?
Thus, if the consumer has arranged his consumption so that every single good brings him marginal utility just exactly proportional to its price, then he could not gain extra utility and thus improve his position by departing from such an equilibrium.
What happens if MU is greater than price paid?
On the other hand, if MU is greater than the price paid, the consumer will enjoy surplus satisfaction from the units he has already consumed. This will induce him to buy more and more units of the commodity leading to successive fall in MU till it is equated to its price. Thus, by a process of trial and error — by buying more or less units, a consumer will ultimately settle at the point where P = MU. Here, his is total utility is maximum.
