Consumer Equlibrium( Cardinal Approach)

▶Consumer Equilibrium- It is a situation where satisfaction of a consumer is at maximum point.

◆It is studied under two approach:
1. Cardinal Approach
2. Ordinal Approach

In this blog we will discuss about Cardinal Approach only.

1. Cardinal Approach- According to this approach satisfaction level of a consumer can be measured in terms of number.
● It was given by Marshall.
● Based on Utility Analysis.

◆ Utility- It is want satisfying power of a commodity.

● It is measured in two concepts:
(i) Total Utility (TU)- It is the sum total of satisfaction derived from consumption of total unit of commodity.
                       ● TU=€MU

(ii) Marginal Utility (MU)- It is additional satisfaction derived from consumption of one extra unit of a commodity.
                       ● MU= TUn - TUn-1
                       ● MU= ∆TU/∆Q. 
where, ∆TU= change in total Utility
             ∆U= Change in units consumed.

▶Law of Diminishing Marginal Utility(DMU)
Law states that as more and more unit of a   commodity is consumed, satisfaction derived from every additional unit (MU) goes decreasing.

◆ It is also known as Gossen 1st Law.
                      ● U⬆  MU⬇   ◆There is an inverse
                      ● U⬇  MU⬆      relation between unit
                                              consumed(U) and                                   
                                              Marginal Utility(MU).
▶ Assumptions
   (i) standard unit of a commodity.
   (ii) Homogeneous Commodity
   (iii) Continuous Consumption

▶Relationship between Total Utility(TU) and Marginal Utility(MU).

(i) When MU is decreasing but remains positive.TU rises at a diminishing rate.

(ii) When MU is zero, TU is maximum and Constant.

(iii) When MU becomes negative, TU starts Falling.

▶Condition of Consumer's Equilibrium in case of single commodity.
(i) Marginal Utility of Commodity(x) = MUx
(ii) Price of Commodity (x)= Px
(iii) Marginal Utility Of Money= MUm

                ●MUm= MUx/Px

▶Consumer Surplus- Total Income which a consumer is willing to pay - What he/she actually pays.

▶What will be the consumer reaction when:
(i) MUm> MUx/Px= Consumer surplus is +ve
(ii) MUm<MUx/Px= Consumer surplus is -ve.

▶ Law of Equi-marginal Utility: This law states as a consumer consumes two or more commodity, Equilibrium will be at a point where satisfaction derived from last rupee spend on every commodity will be the same.

◆ In other words, This law states the ratio between Marginal Utility and price of all commodity will be same.

▶Condition for Consumer's Equilibrium in case of two Commodities.
(i) MUm= MUx/Px = MUy/Py
(ii) Income Fully Utilised.

  Cause.                   Effect.                      Reaction
  Px⬇, Py⬆.      = MUx/Px > Muy/Py       Consumes
                                                                 more of X.  MUx⬆, MUy⬇

Px⬆, Py⬇.       = MUx/Px < MUy/Py        Consumes
                                                                 more of Y.
MUx⬇, MUy⬆