Q. Explain consumer’s equilibrium in case of single commodity (through utility approach).
Ans The Law of DMU can be used to explain consumer’s 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. The number of units to be consumed of given commodity by a consumer depends on 2 factor.
a. Price of given commodity
b. Marginal utility from each successive unit
The determine equilibrium point consumer compare the price of commodity with its utility. Being a rational consumer, he will be at equilibrium when marginal utility is equal to price paid for commodity.
Equilibrium Condition Consumer is in equilibrium in care of single commodity when :
Marginal utility (MUx) is equal to price (Px) paid for commodity. i.e., MU = Pricex
- If MUx > Px, then consumer is not at equilibrium he keeps on buying benefit is greater than cost. As he buys more, MU falls because of operation of law of DMU. When MU becomes equal to price, consumer gets maximum benefits and is in equilibrium. Similarly, when MUx < Px, then also consumer is not at equilibrium as he will have to reduce consumption of commodity X to rais his total satisfaction till MU becomes equal to price.
Suppose the consumer wants to buy a good (say x), which is priced at Rs. 10 per unit.
Further suppose that MU derived from each successive unit (In utils and in Rs.) is determined and is given in table (for sake of simplicity, it is assumed that 1 unit = Rs. 1, i.e., MUM = Rs. 1).
MUx curve slope downwards, Indicating that MY falls with successive consumption of commodity x due to operation of law of DMU. Price (Px) is a horizontal and straight price line as price is fixed at Rs. 10 per unit. It is clear that consumer will be at equilibrium. When he consumes 3 units of commodity x, because at point E, MUx = Px.
Q. How does a consumer attain equilibrium in case of two commodities?
The law of DMU applies in case of one commodity. However, in Real life a consumer normally consumer more than one commodity. In such a situation Law of equi marginal utility helps in optimum allocation of his income.
According to law of equi marginal utility, a consumer gets maximum satisfaction, When Ratio of MU of two commodities & their respective Prices are equal & MU falls as consumption increased.
It means, there are two necessary condition to attain consumer’s. Equilibrium in case of two commodities.
The ratio of marginal utility to price is same in case of both the good ;
consumer is getting more marginal utility per rupee in case of good x as compared to good
y. Therefore he will buy more of X & less of Y. This will lead to fall in MUx & Rise in MUy
Ans. Slope of the Budget will be number of units of good sacrificed that the consumer is willing to sacrifice for an additional unit of another good.
Price of Goods X Falls
Initially AB is the Budget line, As price of Good X fails, Good X relatively cheaper in comparison to good Y. Due to this Budget line will rotate towards right from AB to AB, as shown in given figure. Price of Good Y remains same.
Price of Good Y Rises
Initially AB is the Budget line. As price of Good Y, Rises Good Y becomes relatively expensive in comparison to Good X. Due to this Budget line will rotate towards left from AB to AB1 as shown Good X in given figure. Price of good X remains constant.
Q.19. Which factors lead to shift in Budget line?
Ans. Change in Income of Consumer with lead to shift in Budget line.
This can be understood with the help of two position & Diagram given below. (1) Increase in Income of Consumer :-
When the income of consumer increases, the consumer will be able to buy more bundles of goods, which were were earlier not possible. It will shift the budget line to the right from AB to A, B, The new Budget line A, B, will be parallel to original budget line AB
Decrease In Income Of Consumer :-
When income of consumer decrease, the purchasing power of consumer reduces. It will shift budget line towards left from AB to A, B,. The new B, will be parallel original Budget
Q.27. What are the assumption of Indifference curve?