Consumer: A person who decides what and how much to consume in order to get the satisfaction of his wants.
Equilibrium: The word equilibrium is derived from two Latin words ‘aequi’ means equal and ‘libra’ means balance. In other words, equi means equal and brium means balance which indicates a state of equal balance. Therefore, it refers to the point of rest where there is no tendency to change the existing position.
Consumer’s Equilibrium: It refers to a situation where the consumer spends his entire income on the purchase of a commodity (or combination of goods) in order to get maximum satisfaction. There are two approaches two attain consumer equilibrium.
- Cardinal approach
- Ordinal approach
Cardinal utility: Utility analysis is the oldest approach to the study of consumer behavior. It was given by Alfred Marshall in the 20th century.
According to this analysis, the utility can be measured in cardinal or numerical numbers such as 1, 2, 3, etc.
Utility: It refers to the want-satisfying capacity of a commodity. “It is an expected satisfaction” that a consumer is expecting to gain from the consumption of the commodity. The utility is a relative/ subjective concept. It means that it varies from person to person, at different points of time, different uses, etc. For example, a person who likes non-veg food will get more utility from the consumption of chicken burgers but a person who is pure veg will get no utility as he will resist himself to consume it. The utility is measured in terms of the money which a consumer is willing to pay for a commodity, which is known as “utils”.
Basic Assumptions: [consumer’s equilibrium]
- The consumer is Rational: rationality the consumer is assumed to behave in a rational manner. By rationality, we mean that the consumer chooses deliberately that bundle of goods that maximizes its utility. He maximizes his utility by spending his limited income which gives him a maximum number of units of the commodity.
- Cardinal measurement: According to Marshall when a consumer consumes certain goods and services he gets utility from that, this utility (satisfaction) is measurable in an exact number of units. They are called “utils”. For example, the utility of a classmate register is 40 utils while the utility of one delta register is 30 utils. A consumer will assign more utils to a commodity when likes the commodity and assign less when he dislikes it.
- Marginal utility of money remains constant: Another important assumption of utility analysis is the constancy of the marginal utility of money. It assumed that while the marginal utility of a commodity diminishes with every increase in the quantity of a commodity purchased, the marginal utility of money remains the same. In other words, MUM refers to the worth of a rupee to a consumer there is no defined value of money. So, the consumer is expected to define it himself. For instance, Mr. X is earning £ 1000 per month, on the other hand, Mr. Y is earning £ 1200 per month so worth for every pound to Mr. X would be more as he is earning less income. Similarly, MUM of the poor will always be greater than that of the rich.
The utility is divided into two parts.
- Total Utility (TU)
It refers to the total satisfaction derives from the consumption of all the possible units of a certain commodity. It is the addition of independent utilities derived by the consumption of the different possible units of a commodity.
TU= U1 + U2 + U3 ———————— + Un
- Marginal Utility (MU)
It refers to the additional satisfaction derived from the consumption of an additional unit of that commodity. It is basically the change on TU due to a change in the consumption level. For example, Mr.X was quenching so he drank his first glass of water which gave him say 10 utils and after consuming his second glass of water he obtained total of 14 utils so, MU is this case would be (14-10) utils i.e., 4 utils.
MU = Tun – Tun-1
Types of Marginal Utility: [consumer’s equilibrium]
- Positive MU: If the consumption of additional units, makes TU increasing, then MU is said to be positive.
- Zero MU: If the consumption of an additional unit of a commodity causes no change in the TU, then the MU of this additional unit is said to be zero. A point where MU is zero is known as a “point of satiety” or “point of saturation” which means maximum utility at this point.
- Negative MU: If consumption of the additional unit causes a fall in TU, it means the MU of that unit is Negative. This happens after reaching the saturation point, where the consumer is compelled to consume the additional unit. This point is known as “disutility”
In the above figure:
- The Horizontal axis represented units consumed whereas the vertical axis represents TU/ MU.
- When the consumer consumes 1st unit of the goods he gets the satisfaction of 5 utils, when he consumes 2nd unit of the commodity he gets the satisfaction of 4 utils that is MU equal to 4 and TU is 5 + 4 = 9
- In the same manner, all the points have been plotted which gives a TU and MU curve as above.
Relationship between TU and MU
- As long as MU is positive, TU is increasing till the 4th unit.
- When MU is zero, TU reaches its maximum at the 5th unit. It is also known as the “Point of Satiety”.
- When MU is negative, TU starts falling from the 6th unit and so on.
Law Of Diminishing Marginal Utility. ( DMU )
This law says that as more of a given commodity is consumed the utility derived from the consumption of every increased unit goes on diminishing.
In other words “the additional benefit which a person derives from a given stock of things diminishes with every increase in the stock that he already has.
It was first given by German economist H.M Gossen therefore. It is also called “Gossen’s first law of consumption”. According to Gossen, it is also called the fundamental phycological law of consumption.
This law of finally developed by Dr. Alfred Marshall.Consumer’s Equilibrium
Assumptions: [consumer’s equilibrium]
- Continuous Consumption: They should be no gap between the consumption. By this assumption, we mean that the consumer has to consume the commodity on a continuous basis.
- Consumption of a reasonable quantity: Commodity must be consumed in some standard units such as a cup of tea, a glass of water, and so on.
- No change in quality: The commodity which is being consumed should be homogenous.
Schedule of DMU
|Units Consumed||Marginal Utility|
- In the above figure units consumed are shown on the x-axis, while the MU is shown on the y-axis.
- When the consumer consumed the first unit of the commodity, he got a utility of 5 utils shown by point A in the above graph.
- When the consumer consumes the 2nd unit of the commodity he gets a utility of 4 utils and is depicted by point B on the above graph in the same manner different utilities have been plotted by joining them we get the downward slopping DMU curve.
Exceptions: [consumer’s equilibrium]
- Curious and Rare things
Many persons collect old and rare coins, postage stamps, rare paintings,s, etc. which adds to their stock of rare articles and makes the marginal utility increase.
This law of DMU doesn’t apply to misers who are fond of accruing more and more wealth. Their desire for money seems to be never-ending.
- Good book or poem
It is said that by reading a good book or listening to a melodic song or beautiful poem again and again one gets more utility than before so, good books or poems are considered to be an exception to this law.