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Consumer Equilibrium (TU & MU)

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santosh nair

on 10 June 2013

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Transcript of Consumer Equilibrium (TU & MU)

Concept Of Utility CONSUMER EQUILIBRIUM Who is a consumer....? Assumption related to Consumer Equilibrium Marginal Utility of Money remains constant
Independent Utility: It is assumed that the utility that a consumer gets from the commodity depends upon the quantity of that very commodity alone.It is not affected by the consumption of other goods. A Consumer is an economic agent who uses goods and services for the direct satisfaction of his/her wants..... What is consumer Equilibrium.....? The Consumer is in equilibrium when, given his income and market prices, he plans his expenditure (on different goods and services) in such a manner that he maximizes his total satisfaction..... (a) Rational Consumer
Consumer is assumed to be rational . A rational consumer is one who wants to get maximum satisfaction out of his given income.... Cardinal Utility: Utility of every commodity can be measeured in terms of cardinal numbers, such as 1,2,3,4 etc The Concept of Utility The Want satisfying power of a good or service is called Utility Total Utility: It is the sum total of utilty derived from the consumption of all the units of a commodity.

Marginal Utility : It refers to the additional utility on account of the consumption of an additional unit of commodity Relationship between TU & MU When a consumer goes on to consume the units of a commodity continuously the marginal utility derived from the successive units of the commodity goes on to fall constantly while other factors are held constant. I By taking the successive values of Q, the relationship between MU and TU is represented in the following schedule:

Quantity Total Utility Marginal Utility
1 10 10
2 18 8
3 24 6
4 28 4
5 30 2
6 30 0
7 28 -2

With the help of above schedule the relationship between TU and MU is explained as: In the above schedule MU decreases and TU increases at a decreasing rate upto 5th unit of commodity. MU becomes zero at 6th unit and TU = 30 become maximum. When MC becomes negative, the TU declines from 30 to 28 utils at 7th units of a commodity. With the help of the above schedule the relationship between MU and TU can be represented in the diagram.  In figure (2), MU curve moves downward having negative slope while in figure (1) TU curve, moves upward but tendency to move is with decreasing rate.

At point F´ in figure (2) MU curve cuts the x-axis (implies MU is Zero) at the 6th unit and TU curve is at its maximum (point F) which is saturation point.

At 7th unit MU curve is below x-axis as in figure (2) and TU curve declines from point 'F' to 'G' as in figure (1). Law of diminishing Marginal Utility Law of diminishing marginal utility states that as more and more standard units of a commodity are continuously consumed , marginal utility derived from every additional unit goes on declining. Indeed, it is very natural to happen in respect of all goods and services. It is therefore called 'Fundamental Law of Satisfaction' Or 'Fundamental Psychological Law'
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