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126 Class XI - Economics
UNIT II
CONSUMER'S EQUILIBRIUM & DEMAND
Utility Law of diminishing
marginal utility
Total uitlity Marginal utility
Consumer's equilibrium
Budget set
Budget line
Indifference curves
Demand
Factors affecting individual demand
Factors affecting market demand
Factors affecting price elasticity
of demand
and Equilibrium
Consumer's Behaviour
Points to Remember
Consumer : is an economic agent who consumes final goods
and services to fulfill his basic needs.
Utility : Wants satisfying capacity of goods and services is
called utility.
Total utility : It is the sum of satisfaction/utility a consumer gets
from consumption of all the units of a commodity at a given time.
Marginal Utility : It is a net increase in total utility by consuming
an additional unit of a commodity.
Law of Diminishing Marginal Utility : As consumer consumes
more and more units of commodity the Marginal Utility derived
from each successive units goes on declining.
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127 Class XI - Economics
Consumer's Bundle : It is a quantitative combination of two goods
which can be purchased by a consumer from his given income at
given prices.
Budget set : It is quantitative combination of those bundles which
a consumer can purchase from his given income at prevailing
market prices.
Budget Set : Px . X + Py . Y M
Budget Line : It is a line showing different combinations of two
goods which a consumer can buy by spending his whole income
at given price of the goods.
Budget line : M = Px . x + Py . y
Consumer Budget : It states the real income or purchasing power
of the consumer from which he can purchase the certain quantitative
bundles of two goods at given price.
Monotonic Preferences : Consumer's preferences are called
monotonic when between any two bundles, consumer always
choose a bundle having more of one good and no less of other
goods.
Change in Budget Line : There can be parallel shift (leftwards
or rightwards) due to change in income of the consumer and Rotate
due to change in price of goods.
Marginal Rate of Substitution (MRS) : It is the rate at which a
consumer is willing to substitute good Y for good X.
Loss of Good Y Y MRS or –
Gain of Good X X
Indifference Curve : is a curve showing different combination of
two goods, each combinations offering the same level of
satisfaction to the consumer.
Indifference Map : It refers to a set of indifference curves of a
consumer placed together in a diagram.
Characteristics of Indifference Curve
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128 Class XI - Economics
1. Indifference curves are negatively sloped : because to
increase quantity of one good some units of other has to be
sacrificed to remain on same satisfaction level.
2. Indifference curves are convex to the point of origin :
due to decreasing MRS. MRS decreases due to law of
diminishing marginal utility.
3. Indifference curves never touch or intersect each other :
each indifference curve shows different level of satistation.
Intersection point shows same satisfaction level which is not
possible.
4. Higher Indifference curve represents higher level of
satisfaction : due to monotonic preference. Higher
indifference curve shows bundles having more of one
commodity and not less of other good incomparision of lower
indifference curve.
Consumer's Equilibrium : It is a situation where a consumer is
spending his income in such a way that he is getting maximum
satisfaction and has no tendency to change.
Condition of Consumer's Equilibrium
(a) Cardinal approach (UtilityAnalysis) : According to this
approach utility can be measured. "Utils" is the unit of utility.
Conditions of Equilibrium :
(i) In case of one commodity
1. MU MU If MU 1, MU P
P
x
m m x x
x
Where, MUm = Marginal utility of money
MUx = Marginal utility of 'x', Px = Price of 'x'.
2. MU is decreasing:
(ii) In case of two commodity :
MU MU MU
P P
x y m
x y