Class XI

MICRO ECONOMICS
Consumers
Equilibrium
PRASHANT KIRAD
PRASHANT KIRAD
 PRASHANT KIRAD

Ch:2 Consumers Equilibrium

Utility:
Definition: The want-satisfying capacity of a commodity is called
its utility.
Measurement: Utility can be represented using cardinal numbers
such as 1, 2, 3, etc.
Unit of Measurement: The measuring unit of utility is called
"Utils".

Total Utility (TU)

Definition: Total Utility refers to the sum of all the utilities
derived from consuming all the units of a commodity.
th
Alternative Name: It is also called the addition of all the utility of
2
a commodity by consuming its units.
& 1
Formula:
1 t h
1
TU = U₁ + U₂ + U₃ + ... + Uₙ
d
ira
Where U = utility from each unit (1, 2, 3, ..., n)

Marginal Utility n t
(MU)
K
Definition: sh
a
PraUtility refers to the additional utility derived
Marginal from
consuming one more unit of a commodity.
It measures the change in total utility with respect to the change in
consumption per unit.
Formula:
MU = TUₙ - TUₙ₋₁
Where:
TUₙ = Total utility of the current unit of consumption.
TUₙ₋₁ = Total utility of the previous unit of consumption.
MU = ΔTU / ΔQ
Where:
ΔTU = Change in total utility.
ΔQ = Change in the quantity of consumption.
 PRASHANT KIRAD

Total Utility (TU) vs Marginal Utility (MU)

Total Utility (TU)
Definition:
The sum of all the utility derived from consuming all units of a
commodity.
Formula:
TU = ΣMU
Behavior:
TU increases as more units are consumed.
TU reaches its maximum point when MU becomes zero.
TU declines when MU becomes negative.
Marginal Utility (MU)
Definition: 2th
& 1
The additional utility derived from consuming one more unit of a
commodity.
1th
Formula:
d 1
ira
MU = TUₙ - TUₙ₋₁
Behavior: t K
an
MU continuously decreases as more units are consumed.
h
s
Pra
MU becomes zero when TU is at its maximum.
MU becomes negative when TU starts to decline.

JOSH METER?
 PRASHANT KIRAD

2 th
& 1
1 t h
d 1
ir a
t K
h a n
r a s
P
In the given diagram X’ axis indicates units of commodity and ‘Y’
axis measures TU & MU. MU curve slopes downward whereas; TU
curve goes upward.
MU curve shows zero and negative level of satisfaction whereas,
TU curve shows maximum level of satisfaction.
Exam mai aayega!
(EMA)
The relationship between MU and TU:
1. When the 1st unit of commodity is consumed, MU is equal to TU.
(MU = TU)
2. From 2nd consumption, MU goes on diminishing and TU increases at
a diminishing rate. (MU↓↓↓. and TU ↑↑↑)
 PRASHANT KIRAD

3. At a full satisfaction level, MU becomes zero & TU reaches at

maximum level. It becomes constant. It is called point of satiety. (MU
zero, TU max)
4. After a point of satiety, any additional consumption of unit results
into negative MU while TU starts declining. (MU —ve, TU↓)
5. If any unit of commodity consumed beyond the point of satiety,
consumer experiences dissatisfaction.

Consumer Equilibrium:
Definition:
A situation where a consumer secures maximum satisfaction within
their budget.
Known as the point of balance, where the consumer does not wish to
change their level of satisfaction.
2th
1
Achieved at the quantity of output where the consumer maximizes
&
satisfaction given their income.
1th
Types of Consumer Equilibrium: d 1
ira
t
1. In Case of One CommodityK
2. In Case of Two a
h n
or More Commodities
r
3. In Case a
of s
only Two commodities
P
Consumer’s Equilibrium in Case of One Commodity:
Equilibrium Condition:
A consumer is in equilibrium when the marginal utility (MU) of good
X is equal to the price (P) of good X.
Formula: MUᵪ = Pᵪ
Assumptions:
Rational Consumer:
The consumer acts rationally to maximize satisfaction.
Constant Marginal Utility of Money:
The marginal utility of money remains constant.
Continuous Consumption:
The consumer engages in continuous consumption of the commodity.
 PRASHANT KIRAD

Unchanged Budget:
The consumer's budget or income remains unchanged during the
consumption period.

Conditions:
MUx/Px = MUm , Where,MUx/Px = Marginal utility of money
expenditure on good’x’
Mum = Marginal utility of money
MUx = Px
Value of marginal utility of good ‘x’ must be equal to one.
MUx/MUm=Px

2th
& 1
1th
d 1
ira
t K
han
s
Pra
 PRASHANT KIRAD

th
In the above graph, the slope of the curve is going downward,
2
1
which indicates that the marginal utility falls when an additional
&
1th
commodity of x is consumed (because of the Law of DMU). Also,
1
the Price (Px) is a straight horizontal line as the price of the
d
ira
commodity is fixed at ₹10 per unit.
K
With the help of the above schedule and graph, it can be said
t
an
that the consumer will be at equilibrium at point E, when he
h
s
Pra
consumes 3 units of commodity x because at that point MUx = Px.
The consumer will not consume 4 units of the commodity x
because the MU of ₹0 is less than the price paid for x; i.e., ₹10.
Similarly, he will not consume 2 units of the commodity x because
the MU of ₹20 is more than the price paid for x; i.e., ₹10.
Hence, in conclusion, it can be said that a consumer consuming a
single commodity (say x) will be at equilibrium when the Marginal
Utility from the commodity (MUx) is equal to the price paid for
the commodity (Px).
 PRASHANT KIRAD

Consumer’s Equilibrium in 2 or more Commodities Case:

The Law of Diminishing Marginal Utility is applicable only in the case

of either one commodity or single use of a commodity. However, in
reality, consumers consume more than one commodity; therefore, in
those cases, the Law of Equi-Marginal Utility is used as it helps in the
optimum allocation of the consumer’s income.

Schedule:
Let us assume that the total money income of a consumer is ₹7, which
he wants to spend on commodities x and y. The price of each of these
commodities is ₹1 per unit. Hence, the consumer can purchase maximum
7 units of commodity x, or 7 units of commodity y. The marginal utility
th
derived by the consumer from different units of x and y are:
2
& 1
1th
d 1
ira
t K
han
s
Pra
 PRASHANT KIRAD

2 th
In the above graph, MU for commodity x is represented1 on OY-axis,
& Besides, MUx
1 t h
and MU from commodity y is represented on O1Y1-axis.

d 1
and MUy are the Marginal Utility curves for commodities x and y,
respectively.
The above table and graphK ira
clearly show that the consumer will spend
n t
the first rupee on commodity
a x, which will provide him 26 utils of
s
utility and will
a h
spend the second rupee on commodity y which will
r 22 utils of utility. In order to reach the position of
providePhim
equilibrium, the consumer should buy that combination of goods x and
y, when the MU of the last rupee spent on each commodity (x and y) is
the same and MU falls as consumption increases.
(EMA)
Law of Diminishing Marginal Utility:

Statement of Law:
The law states that "When a consumer consumes a particular
commodity continuously, the utility derived from each
successive unit diminishes."
 PRASHANT KIRAD

Assumptions of the Law:

1. Cardinal Measurement of Utility:
Utility must be measurable in cardinal numbers (e.g., 1, 2, 3,
etc.).
2. Constant Income:
The income of the consumer must remain unchanged during
the consumption period.
3. Continuous Consumption:
The consumption of the commodity should be continuous.
4. Uniformity of Goods:
The quantity, quality, and size of the goods must remain the
same at all stages of consumption.
5. Constant Marginal Utility of Money:
2 th
1
The marginal utility of money should remain constant.
&commodities:
Consumer’s equilibrium in case of only
1 t h 2
d 1
r a
In case of 2 commodities the consumer equilibrium can be represented
ias Indifference Curve(IC).
K
with the help of a curve known
t
h
Indifference curve a n theory (I.C)/Ordinal curve theory:
r a s
P
It is the alternative combination of consumption of 2 goods which gives
the same level of satisfaction. In other words, It is a curve which
represents about the various combination of consumption of 2 goods
which gives the same level of satisfaction.
 PRASHANT KIRAD

Indifference curve:
It is a curve that shows the combination of goods which gives the
same level of satisfaction to the consumers so that an individual is
indifferent. In other words, the consumer gives equal preference to
all such combinations.
It is a graph that gives a consumer equal satisfaction, making the
consumer indifferent. An indifference curve shows the combination
of services which a consumer can prefer over the other

Properties of Indifference Curve:

The difference curve has a negative slope.
Indifferent curves do not intersect.
They are convex from below, i.e., convex to the origin.
2 th
An indifference curve that lies to the right of another, yields more
utility. & 1
1 t h
Indifference Map:
d 1
An Indifference Map is a Ksetir
a
of Indifference Curves. It depicts the
complete picture of n
a t
a consumer’s preferences. The following diagram
s h
shows an indifference map consisting of three curves:
Pra
 PRASHANT KIRAD

We know that a consumer is indifferent among the combinations

lying on the same indifference curve. However, it is important to
note that he prefers the combinations on the higher indifference
curves to those on the lower ones.
This is because a higher indifference curve implies a higher level of
satisfaction. Therefore, all combinations on IC1 offer the same
satisfaction, but all combinations on IC2 give greater satisfaction
than those on IC1.

Budget Line:
Definition:
A budget line represents the different combinations of two goods
that a consumer can purchase with a given money income and the
prices of the goods.
Equation of Budget Line: 2th
Formula: M = PₓQₓ + PᵧQᵧ & 1
Where:
1th
M = Money income
d 1
i
Pₓ = Price of good Xra
t K
Qₓ = Quantity of good X
ha n
Pᵧ = Price of good Y
ra s
Qᵧ = Quantity of good Y
P
Slope of Budget Line:
Negative Slope:
The budget line slopes negatively (downward) due to the constant money
income of the consumer.
Trade-off Between Goods:
To increase the quantity of good X purchased, the consumer must reduce
the quantity of good Y purchased.
Formula:
Slope of Budget Line = Pₓ / Pᵧ
Where:
Pₓ = Price of good X
Pᵧ = Price of good Y
 PRASHANT KIRAD

Budget Constraints:
Definition:
Budget constraints represent the limit on the quantity of goods a
consumer can purchase, given their income level.
Constraint Condition:
The total expenditure on goods must be less than or equal to the
consumer's income.
Formula:Budget Constraint: Pₓ × Qₓ + Pᵧ × Qᵧ ≤ Money Income
Where:
Pₓ = Price of good X
Qₓ = Quantity of good X
Pᵧ = Price of good Y
Qᵧ = Quantity of good Y
2 th
Types of Points on the Budget Line: & 1
On the Budget Line:
1 th
Represents combinations that fully use
d 1 the consumer’s income.
Inside the Budget Line:
ir a
t
Represents combinations K that cost less than the total income,
h n
feasible but notafully utilizing the budget.
s Line:
Outside theaBudget
r
P combinations that exceed the consumer’s income, thus
Represents
unattainable.
 PRASHANT KIRAD

(EMA)
Change in budget line:
There is a shift in the budget line when there is a change in the income
of the consumer or when there is a change in the prices of either one
or both commodities.

1. Effect of a Change in the Income of Consumer:

While assuming that the price of Good X and Good Y in the above
example remains constant, if there is a change in the income of the
consumer, then the budget line will shift. When there is an increase in
the income of the consumer, then he will be able to purchase more
bundles of Good X and Good Y, which were not possible for him earlier.
This will shift the budget line to the right from AB to A1B1. This new

th
budget line will be parallel to the original budget line. Similarly, when
2
& 1
there is a reduction in the income of the consumer, then the budget
line will shift to the left from AB to A2B2.
1th
d 1
ira
t K
han
s
Pra

2. Effect of Change in Prices of the Commodities:

i) Change in Prices of both Commodities: When the price of both goods
changes, then the budget line will shift. If the price of both goods
falls then the Budget Line will shift right from AB to A1B1. However,
if the price of both goods increases then the Budget Line will shift to
the left from AB to A2B2.
 PRASHANT KIRAD

ii) Change in the Price of Commodity on the X-axis (Good X):

2th
When the price of Good X falls, then the budget line will rotate to the
& 1
right from, AB to A1B. It means that the new budget line will meet the
th
Y-axis at the same point; i.e., B because the price of Good Y has not
1
1
changed; however, it will touch the X-axis at point A1, because the
d
ira
consumer can now buy more units of Good X with his same income level.
t K
Similarly, if the price of Good X rises, then the budget line will rotate
han
to the left from AB to A2B.
s
Pra
 PRASHANT KIRAD

Consumer Equilibrium in Indifference Curve Theory

Equilibrium Point:
The consumer is in equilibrium where the indifference curve and
budget line intersect.
This point represents the maximum level of satisfaction
(indifference curve) with the given level of income (budget line).
Equilibrium Condition:
Formula: E = MRS (x→y) = Pₓ / Pᵧ
Explanation: The Marginal Rate of Substitution (MRS) between two
goods must equal the ratio of their prices.
Condition:
MRS (x→y) = Pₓ / Pᵧ
This means the rate at which the consumer is willing to
2th
substitute good X for good Y should match the price ratio of
the two goods. & 1
Slope Condition:
1th
1
Formula: Slope of Indifference Curve = Slope of Budget Line
d
ira
Explanation: The slopes must be equal for equilibrium:
t K
ΔY / ΔX = Pₓ / Pᵧ
han
This condition ensures that the consumer is maximizing their
s
Pra
satisfaction given their budget constraints.
 PRASHANT KIRAD

Cardinal vs. Ordinal Utility

Cardinal Utility:
Measurement:
Utility is measured in quantitative numbers (e.g., 1, 2, 3, ...).
Expression:
Utility can be expressed in two theories:
In one commodity.
In more than two commodities.
Nature:
It is psychological in nature.
Ordinal Utility:
Measurement:
th
Utility is measured in ordinal numbers based on preferences.
2
Expression:
& 1
1th
Utility is expressed using:
Indifference curves.
d 1
ira
Budget lines.
Nature:
t K
han
It is real and comparable in nature (e.g., IC1 > IC2).
s
Pra
 PRASHANT KIRAD

Top 5 Questions
Q1.State the law of diminishing marginal utility.
Ans:Law of diminishing marginal utility states that as we consume more and
more units of a commodity the utility derived from each successive unit
goes on decreasing.

Q2.Define the following terms: (1) Marginal utility, (2) Total utility
Ans:a) In economics, utility is the satisfaction or benefit derived by
consuming a product; thus the marginal utility of a goods or service is the
change in the utility from an increase in the consumption of that good or
service.
b) Total utility is the total satisfaction received from consuming a given
total quantity of a good or service, while marginal utility is the satisfaction
2 th
gained from consuming an additional quantity of a particular good or service

& 1
Q3.Explain the concept of consumer equilibrium. h
1t they consume. This
Ans:Consumers derive utility from each1 commodity
utility is dependent on the price a ofd
ir a product. The point at which the
K equals its price (P) is where consumer
marginal utility (MU) of a product
a n
satisfaction maximizes.
t
It is expressed as MU = P. If the marginal utility of

a s h
a product is higher than the price a consumer would continue to purchase
r and vice versa until MU equals the fixed price level.
Punits
additional

Q4.Define the term Indifference curve.

Ans: Indifference curve: An indifference curve is a graph showing
combination of two goods that give the consumer equal satisfaction and
utility. Each point on an indifference curve indicates that a consumer is
indifferent between the two and all points give him the same utility.

Q5.Explain the difference between cardinal utility and ordinal utility.

Give example
Ans: Cardinal utility assigns numerical values to consumer satisfaction
(e.g., milk = 3 utils). Ordinal utility ranks preferences without assigning
specific numbers (e.g., milk preferred to soda). Cardinal utility is
quantitative, while ordinal utility is qualitative.