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Published on: 23/09/2019
Consumer's Equilibrium and Demand
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1.
Distinguish between increase in demand and increase in quantity demanded of a commodity.
2.
Suppose a consumer can afford to buy 6 units of good X and 8 units of good Y, if he spends her entire income. The prices of two goods are Rs.6 and Rs.8, respectively. How much is the consumer's income?
3.
Explain the conditions of consumer's equilibrium with the help of Indifference Curve analysis.
4.
Explain the three properties of the Indifference Curves
5.
Explain why is an Indifference Curve:
(i)downward sloping (ii)convex
6.
What is the relation between X and Y, in each case, if with the fall in the price of X demand for Y (i) rises and (ii) falls? Give reasons.
7.
Define MRS. Explain why an Indifference curve is convex.
8.
Explain the condition of determining how many units of a good consumer will buy at a given price.
9.
Explain the relationship between total utility and marginal utility with the help of a schedule and diagram
10.
State and explain the characteristics of an indifference curve.
1.
| Basis | Increase in demand | Increase in quantity demanded |
| (i)Cause | Increase in demand is due to change in factors other than price e.g. increase in income, favourable change in tastes ete. | Increases in quantity demanded is due to fall in the own price of the given commodity. |
| (ii)Demand curve | Increase in demand leads to rightward shift of the demand curve from DD' to D1D1. | Increase in quantity demanded leads to downward movement along a demand curve. |
| (iii)Diagram | ![]() |
![]() shown by 'Downward Movement' along the demanded curve from point A to point B |
2.
The consumer's income will be equal to the money obtained from budget line equation.
Given, price of good X=Rs.6
Price of good Y=Rs.8
X=6 units, Y=8units, M=PXX+PYY
=6X6+8X8=36+64=100
consumers income =Rs.100
3.
A consumer is said to be in equilibrium, when he is spending his given income on various goods in such a way that maximises his satisfaction.
Condition of consumer's equilibrium in case of a single commodity: Consumer's equilibrium in case of a single commodity is attained when the marginal utility of the commodity measured in terms of money is equal to its price.Symbolically,
(i) MUx = Px
(ii) MU decreases with increase in quantity consumed.
Condition of consumer's equilibrium in case of two commodities: Consumer's equilibrium in case of two commodities is attained when the ratio of the marginal utilities of two goods and their prices is equal.
(i)\({MU_x\over P_x}={MU_x\over P_Y}\)
(ii) MU decreases with increase in quantity consumed.
This is, however, subject to the budget constraint that the money spent just equals income, i.e. Px.Qx + Py• Qy = M.
4.
Indifference curve is defined as the curve which represents all combinations of two commodities which give same level of satisfaction to the consumer so that the consumer becomes indifferent towards these combinations.Following are the main properties of Indifference Curve:
(a) An Indifference Curve is always downward sloping:The indifference curve is negatively sloped or downward sloping from left to right which represents that in order to increase the consumption of commodity X, the consumer has to sacrifice commodity Y in order to remain at the same scale of preference or same level of satisfaction represented by the Indifference curve.
(b) An Indifference Curve is convex to origin: The nature and shape of indifference curve is based on the concept of diminishing marginal rate of substitution. According to which the rate of sacrifice in terms of commodity Y in order to increase the consumption of commodity X decreases with every increase in unit of commodity X due to which an indifference curve is always made convex to origin . The marginal rate of substitution depends on relative marginal utilities derived from X and Y. When the consumer consumes more of X after sacrificing Y, when it leads to decrease in MU for X and increase in MU for Y due to which the consumer becomes willing to sacrifice lesser units of Y with every increase in consumption of X due to which MRS decreases and IC is convex to origin .
(c) Higher Indifference Curve represents higher scale of preference: Indifference curve analysis is based on the assumption of monotonic preferences which represents that higher consumption of a commodity gives higher level of satisfaction to the consumer. A higher indifference curve represents that the consumer is able to consume more units of the commodity and hence represents higher scale of preference to the consumer.
5.
(i)Downward sloping: It is because of the simple units of one good, he will have no reduce the number of units of another good, because of constant money income
(ii)Convex: Indifference Curve is convex to the point of origin because of diminishing Marginal Rate of Substitution. For every additional unit of a good, a consumer is willing to give up less and less amount of another good.
6.
(i) If with the fall in price of X demand for Y rises, then X and Y are complementary goods because there exists an inverse relationship between price of one good and demand of the other good, in case of complementary good. Px↓DY↑.
(ii) If with the fall in price of X, the demand for Y also falls, Px↓DY↑ then X and Yare substitute goods. Because there exists direct relationship between price of one good and demand of the other good, in case of substitute good.
7.
Marginal Rate of Substitution: MRS of X for Y refers to the number of units of good Y that the consumer is willing to forego for an additional unit of good X, so as to maintain the same lever. of satisfaction.
Indifference curve is convex to origin due to diminishing marginal rate of transformation.
MRS falls because when more and more units of X are obtained, its marginal utility declines and the consumer likes to sacrifice less of Y to obtain an additional unit of X. So, MRS declines.
8.
Factors determining how many units of a good the consumer will buy are:
(a) Its Marginal Utility (b) Its Price
Consumer compares its marginal utility with its price. If marginal utility is more than price, he will continue to buy more, till the point is reached where marginal utility becomes equal to the price.
Following conditions must be satisfied for a consumer to be in equilibrium (getting maximum satisfaction)
(i) MU of a commodity = Price of the commodity, i.e., MUx = Px
(ii) MU should decrease with increase in consumption.
9.
Utility is the want satisfying power of a commodity. The relationship between MU and TU is as follows:
(i) When MU is positive TU rises' at diminishing rate.
(ii) When MU is zero, TU is maximum and constant.
(iii) When MU is negative, TU falls.
The following utility schedule and diagram illustrates the relationship:

10.
Indifference curve is defined as the curve which represents all combinations of two commodities which give same level of satisfaction to the consumer so that the consumer becomes indifferent towards these combinations.Following are the main properties of Indifference Curve:
(a) An Indifference Curve is always downward sloping:The indifference curve is negatively sloped or downward sloping from left to right which represents that in order to increase the consumption of commodity X, the consumer has to sacrifice commodity Y in order to remain at the same scale of preference or same level of satisfaction represented by the Indifference curve.
(b) An Indifference Curve is convex to origin: The nature and shape of indifference curve is based on the concept of diminishing marginal rate of substitution. According to which the rate of sacrifice in terms of commodity Y in order to increase the consumption of commodity X decreases with every increase in unit of commodity X due to which an indifference curve is always made convex to origin . The marginal rate of substitution depends on relative marginal utilities derived from X and Y. When the consumer consumes more of X after sacrificing Y, when it leads to decrease in MU for X and increase in MU for Y due to which the consumer becomes willing to sacrifice lesser units of Y with every increase in consumption of X due to which MRS decreases and IC is convex to origin .
(c) Higher Indifference Curve represents higher scale of preference: Indifference curve analysis is based on the assumption of monotonic preferences which represents that higher consumption of a commodity gives higher level of satisfaction to the consumer. A higher indifference curve represents that the consumer is able to consume more units of the commodity and hence represents higher scale of preference to the consumer.
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