2consumer Behaviour & Utility-1

Chapter 3
Consumer Equilibrium
Introduction
• How does a consumer determine the

amount of a commodity that should be
consumed ?
• Depends on:
– Level of satisfaction derived
– Level of income
• Constrains consumption
Basic Concepts
• Utility is the satisfaction an individual

derives from the consumption of a
particular commodity
– Psychological phenomenon
– Marshall suggested - it can be measured
– Unit of measure - ‘Utils’

Basic Concepts
Utility
Total Utility (TU) Marginal Utility (MU)
• Sum total of the • Additional satisfaction

satisfaction derived derived when one more
when a given number unit of the commodity
of units of a commodity is consumed
are consumed
• Eg: MU of the 3rd cup of
• Eg: the TU after 3 cups ice-cream is TU of 3
of ice-cream is the sum cups minus TU of 2
of the satisfaction from cups
the 1st, 2nd and 3rd cups
Total Utility and Marginal Utility
Cups of Ice-cream (N) TU (utils) MU (utils)= ∆TU/ ∆N
1 18 18 – 0 = 18
2 34 34 – 18 = 16
3 46 46 – 34 = 12
4 51 51 – 46 = 5
5 51 51 – 51 = 0
6 43 43 – 51 = -8
Cups of ice-cream (N) TU= Σ MU (utils) MU (utils)

1 18 18
2 18 + 16 = 34 16
3 34 + 12 = 46 12
4 46 + 5 = 51 5
5 51 + 0 = 51 0
6 51 - 8 = 43 -8
60
Total Utility Curve
Number of
50
Cups TU
0 0
40 1 18
2 34
Total Utility
30 3 46
4 51
5 51
20
6 43
10
0
0 1 2 3 4 5 6
Number of units consumed
Total Utility Curve
60
50
TU
40
Total Utility
30
20
10
0
0 1 2 3 4 5 6
Relationship between TU & MU
60
50
40
TU
Total Utility
30
20
10
0
0 1 2 3 4 5 6

Marginal Utility
0 No. of units consumed

MU
60
50
40 TU
Total Utility
30
20
10
0
0 1 2 3 4 5 6

Marginal Utility
No. of units consumed

0 MU
60
50
40
TU
• When MU is decreasing
Total Utility
30 and positive, TU
20
increases at a
10
decreasing rate
0
0 1 2 3 4 5 6 • When MU=0, TU is at
Number of units consumed its maximum point
• When MU is decreasing
and is negative, TU
Marginal Utility
starts declining
0 No. of units consumed

MU
Law of Diminishing Marginal Utility
• Statement of Law:
As more and more units of a commodity are

consumed, the level of satisfaction derived from
every additional unit of the commodity
eventually declines
• Implies that MU could increase initially, but

will eventually decline
• Law highlights the behaviour of MU with units of

the commodity consumed
Assumptions
• Utility is measurable - ‘Utils’
• Consumption takes place continuously over a

stipulated time period
• Reasonable amount of the commodity forms a

unit
– A grain of rice is NOT a reasonable amount
• Consumers are rational
• Marginal utility of money is held constant

Consumer Equilibrium - Single Commodity
• Equilibrium is state of balance

• No reason to deviate from equilibrium
• At equilibrium, consumer’s satisfaction is maximum,
subject to budget constraint
• Conditions for consumer equilibrium:
– Net benefit is maximised
• Net benefit is the difference between the TU in money terms and
the expenditure made on consumption
– MU in money terms is equal to the price of the commodity

Condition for Consumer Equilibrium:
• Net benefit is maximized
• Difference between the total utility in money terms and

expenditure is maximized
Assumptions:
• Marginal utility of the Rupee is equal to 1
• Price per cup of ice cream is : Rs 12

Total utility and expenditure on the consumption of ice creams
Units Total utility TU in money Total expenditure Difference

consumed (in utils) terms (TU/MUR) (pxq) (in Rs) (net benefit) (in Rs)
1 18 18 12 6

1 18 18 12 6
2 34 34 24 10

1 18 18 12 6
2 34 34 24 10
3 46 46 36 10

1 18 18 12 6
2 34 34 24 10
3 46 46 36 10
4 51 51 48 3

1 18 18 12 6
2 34 34 24 10
3 46 46 36 10
4 51 51 48 3
5 51 51 60 -9

1 18 18 12 6
2 34 34 24 10
3 46 46 36 10
4 51 51 48 3
5 51 51 60 -9
6 43 43 72 -29

1 18 18 12 6
2 34 34 24 10
3 46 46 36 10
4 51 51 48 3
5 51 51 60 -9
6 43 43 72 -29
General Principle:
MU of commodity
= Price of commodity
MU of rupee
MUx MUX is marginal utility of

= Px
MUR MUR commodity x in money terms
Where: MUX is the marginal utility of commodity x

MUR is the marginal utility of rupee
PX is the price of commodity x
General Principle:
MU of commodity
MU of rupee
MUx
= Px
MUR
Marginal Utility / Price
E Px
0
MUx
Units of the commodity
General Principle:
MU of commodity
MU of rupee
MUx
= Px
MUR
E Px
0 Q’
MUx
General Principle:
MU of commodity
MU of rupee
MUx
= Px
A
MUR
E Px
B
AQ’’: Marginal Utility

BQ’’: Marginal
Expenditure
0 Q” Q’
MUx
General Principle:
MU of commodity
MU of rupee
MUx
= Px
A
MUR Marginal Net Benefit
E Px
B

BQ’’: Marginal
Expenditure
0 Q” Q’
MUx
General Principle:
MU of commodity
MU of rupee
MUx
= Px
A
MUR Marginal Net Benefit
E Px
B

BQ’’: Marginal
Expenditure
0 Q” Q’
MUx
General Principle:
MU of commodity
MU of rupee
MUx
= Px
A
MUR
E C Px
B
DQ’’’: Marginal Utility D
CQ’’’: Marginal
Expenditure
0 Q” Q’ Q’’’
MUx
General Principle:
MU of commodity
MU of rupee
MUx
= Px
A
MUR
Marginal Net Loss
E C Px
B
Expenditure
0 Q” Q’ Q’’’
MUx
General Principle:
MU of commodity
MU of rupee
MUx
= Px
A
MUR
Marginal Net Loss
E C Px
B
Expenditure
0 Q” Q’ Q’’’
MUx
General Principle:
MU of commodity
MU of rupee
MUx
= Px
A
MUR Point of Equilibrium
E C Px
B
0 Q” Q’ Q’’’
MUx
Assumptions: MU of rupee is 3 and Price per ice cream is Rs 4

consumed (in utils) terms (TU/MUR) (pxq) (in Rs) (net benefit)
1 15 5 4 1

1 15 5 4 1
2 34 11.3 8 3.3

1 15 5 4 1
2 34 11.3 8 3.3
3 46 15.3 12 3.3

1 15 5 4 1
2 34 11.3 8 3.3
3 46 15.3 12 3.3
4 51 17 16 1

1 15 5 4 1
2 34 11.3 8 3.3
3 46 15.3 12 3.3
4 51 17 16 1
5 51 17 20 -3

1 15 5 4 1
2 34 11.3 8 3.3
3 46 15.3 12 3.3
4 51 17 16 1
5 51 17 20 -3
6 43 14.3 24 -9.7

1 15 5 4 1
2 34 11.3 8 3.3
3 46 15.3 12 3.3
4 51 17 16 1
5 51 17 20 -3
6 43 14.3 24 -9.7
Consumer Equilibrium - Two Commodities Case
• Equilibrium condition for commodity x:

Mux
= Px
MuR
Mux
=MuR ------------------ (i)
Px

Mux
= Px
MuR
Mux
=MuR ------------------ (i)
Px
• Equilibrium condition for commodity y:

Muy
= Py
MuR
MuY
= MuR ------------------ (ii)
PY

Mux
= Px
MuR
Mux
=MuR ------------------ (i)
Px
• Equilibrium condition for commodity y:

Muy
= Py
MuR
MuY
= MuR ------------------ (ii)
PY
• (i) = (ii)
Mux MuY
= = MuR
Px PY
Consumer Equilibrium - Two Commodity Case
Equilibrium conditions for 2 commodities
• Ratio of the marginal utility to price of one

commodity is equal to the ratio of the
marginal utility to the price of the second
commodity
Mux MuY
=
Px PY
• Expenditure on both commodities should be

less than or equal to consumer’s income
– Px . Qx + Py . Qy < Y
Shyama has Rs 10 to spend on oranges and apples.
Price of each fruit is Rs 2 per kg. Using the marginal utility
schedule given below determine the extent to which Shyama
should consume each of the fruits to maximize her satisfaction.
Quantity in Kgs MU of apples MU of oranges

1 16 14
2 14 12
3 12 10
4 10 8
5 8 6
Quantity MU MU of MU of apples/ MU of oranges/

in Kgs of apples oranges price of apples price of oranges
1 16 14 8 7
2 14 12 7 6
3 12 10 6 5
4 10 8 4 3
5 8 6 4 3
In the above table the ratios of marginal utilities to prices are equal for
the following combinations of apples and oranges:
2 apples + 1 orange
3 apples + 2 oranges
The expenditure incurred on each of the above combinations is given in
the table below:
No. of No. of Price of Price of Expenditure Expenditure Total

Apples oranges Apples Oranges on Apples on Oranges Expenditure
(Rs) (Rs) (Rs) (Rs) (Rs)
2 1 2 2 4 2 6
3 2 2 2 6 4 10
4 3 2 2 8 6 14
5 4 2 2 10 8 18
Shyama chooses 3 kg of apples and 2 kg of oranges as she maximises

utility, subject to her budget of Rs 10

2consumer Behaviour & Utility-1

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Chapter 3

• How does a consumer determine the

• Utility is the satisfaction an individual

– Marshall suggested - it can be measured

– Unit of measure - ‘Utils’

Total Utility (TU) Marginal Utility (MU)

• Sum total of the • Additional satisfaction

Cups of ice-cream (N) TU= Σ MU (utils) MU (utils)

Number of units consumed

0 No. of units consumed

Number of units consumed

No. of units consumed

0 No. of units consumed

As more and more units of a commodity are

• Implies that MU could increase initially, but

• Law highlights the behaviour of MU with units of

• Consumption takes place continuously over a

• Reasonable amount of the commodity forms a

– A grain of rice is NOT a reasonable amount

• Consumers are rational

• Marginal utility of money is held constant

• Equilibrium is state of balance

– MU in money terms is equal to the price of the commodity

• Net benefit is maximized

• Difference between the total utility in money terms and

• Marginal utility of the Rupee is equal to 1

• Price per cup of ice cream is : Rs 12

Units Total utility TU in money Total expenditure Difference

Units Total utility TU in money Total expenditure Difference

Units Total utility TU in money Total expenditure Difference

Units Total utility TU in money Total expenditure Difference

Units Total utility TU in money Total expenditure Difference

Units Total utility TU in money Total expenditure Difference

Units Total utility TU in money Total expenditure Difference

MUx MUX is marginal utility of

Where: MUX is the marginal utility of commodity x

AQ’’: Marginal Utility

AQ’’: Marginal Utility

AQ’’: Marginal Utility

DQ’’’: Marginal Utility D

DQ’’’: Marginal Utility D

DQ’’’: Marginal Utility D

Total utility and expenditure on the consumption of ice creams

Total utility and expenditure on the consumption of ice creams

Total utility and expenditure on the consumption of ice creams

Total utility and expenditure on the consumption of ice creams

Total utility and expenditure on the consumption of ice creams

Total utility and expenditure on the consumption of ice creams

Total utility and expenditure on the consumption of ice creams

• Equilibrium condition for commodity x:

• Equilibrium condition for commodity x:

• Equilibrium condition for commodity y:

• Equilibrium condition for commodity x:

• Equilibrium condition for commodity y:

• Ratio of the marginal utility to price of one

• Expenditure on both commodities should be

Quantity in Kgs MU of apples MU of oranges

Quantity MU MU of MU of apples/ MU of oranges/

No. of No. of Price of Price of Expenditure Expenditure Total

Shyama chooses 3 kg of apples and 2 kg of oranges as she maximises

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