Presentation by Dr V K R V RAO

Presentation by Dr. V. K. R. V. RAO (GROUP)

Consumer’s Equilibrium � CLASS � � : XII SUBJECT : ECONOMICS Topic : The Consumer’s Equilibrium (in Case of Two Commodities) Presented by Mr. Suman Kumar KV AFS Kasauli Chandigarh Region

TOPIC The Consumer’s Equilibrium in Case of Two Commodities

MEANING OF CONSUMER q. Consumer is an economic agent who consumes goods and services for the satisfaction of his wants. q. The objective of a consumer is to get maximum satisfaction from expenditure incurred on goods and services

Introduction The goal of a consumer is to get maximum satisfaction from the commodities he purchases. At the same time, the consumer possesses limited resources. Hence, he is trying to maximize his satisfaction by allocating the available resources (money income) among various goods and services rationally. This is the main theme of theory of consumer behavior. Further, you could ascertain that a consumer is in equilibrium when he obtains maximum satisfaction from his expenditure on the commodities given the limited resources.

MEANING OF CONSUMER’S EQUILIBRIUM � Consumer ‘s equilibrium refers to a situation in which consumer gets maximum satisfaction after spending his entire income on various goods. or services

Meaning of consumer’s equilibrium in case of two commodities Consumer ‘s equilibrium refers to a situation in which consumer gets maximum satisfaction after spending his entire income on two goods or services.

Assumptions 1. The consumer under consideration is a rational human being. This means that the consumer always tries to maximize his satisfaction with limited resources. 2. The consumer has perfect knowledge about the products available in the market. For instance, prices of commodities. 3. Prices of commodities and consumer’s money income are given. 4. Consumer’s tastes, preferences and spending habits remain unchanged throughout the analysis.

Two necessary conditions : q. Marginal Utility (MU) of last rupee spent on each commodity is same: q MU falls as consumption increases:

Equating 1 and 2, we get: MUX/PX = MUY/PY = MUM (i) We know, a consumer in consumption of single commodity (say, x) is at equilibrium when MUx/Px =MUM (ii) Similarly, consumer consuming another commodity (say, y) will be at equilibrium when MUY/PY =MUM

CONSUMER’S EQUILIBRIUM FOR MORE THAN TWO GOODS � Equilibrium goods: MUx Px = MUy Py condition for more than two = MUz Pz = M. U. M and so forth

CONSUMERS EQUILIBRIUMunder two commodities � � Suppose a consumer consumes only two goods. Let these goods be X and Y Prices Px and Py. Consumer attains equilibrium only when the following condition is satisfied: The assumption of consumer’s equilibrium for one good is extended to two good also.

Consumer’s Equilibrium in Case of Two Commodities schedule: UNIT 3 1 2 3 4 5 of MU MU of commodity ‘y’ (in utils) commodity 16 12 ‘x’ ‘y’ (in utils) 20 14 12 7 5 16 12 8 5 3

Diagram

In the above diagram it is obvious that the consumer will spend the first rupee on commodity ‘x’, which will provide him utility of 20 utils. The second rupee will be spent on commodity ‘y’ to get utility of 16 utils. To reach the equilibrium, consumer should purchase that combination of both the goods, (i) MU of last rupee spent on each commodity is same; and(ii) MU falls as consumption increases and at point E consumer is in equilibrium MUX/PX = MUY/PY = MUM.

HOMEWORK � Question 1. State the conditions of consumers equilibrium through utility analysis when a consumer purchases two commodities. � � Question 2. Draw the diagram of consumers equilibrium