Chapter 3 Consumer’s Equilibrium Cardinal Utility

CONSUMER

A Consumer is one who buys goods and services for satisfaction of wants.

 

MEANING OF CONSUMER’S EQUILIBRIUM

Consumer’s equilibrium refers to a situation where the consumer has achieved maximum possible satisfaction from the quantity of the commodities purchased given his/her income and prices of the commodities in the market.

 

There are two main approaches to study consumer’s equilibrium. They are as follows:

  1. Cardinal utility approach (or Marshall’s utility analysis)
  2. Ordinal utility approach (or indifference curve analysis)

 

CARDINAL UTILITY APPROACH

UTILITY: Utility is defined as the power of a commodity to satisfy a human want e.g. a thirsty person derives satisfaction from drinking a glass of water.

 

Marginal Utility (MU)

Marginal utility is the addition to the total utility derived from the consumption

of an additional unit of a commodity.

 

Total utility

Total utility is the total satisfaction obtained from the consumption of all

possible units of a commodity

 

LAW OF DIMINISHING MARGINAL UTILITY

It states that ‘as more and more units of a commodity are consumed, marginal utility derived from each successive unit goes on diminishing.’

 

Assumption of Law of Diminishing Marginal Utility

 

  1. It is assumed that utility can be measured and a consumer can express his satisfaction in quantitative terms like 1, 2, 3 etc. We have already said that unit of measurement of utility is ‘util’. So utility is cardinal.

 

  1. Quality of the commodity should not undergo any change. Take the above example of glass of water. From the quality point of view a consumer who drinks a glass of cold water must continue with the same. He or she cannot change its quality from cold to normal as normal water give different satisfaction.

 

CONSUMER’S EQUILIBRIUM IN CASE OF A SINGLE COMMODITY

Consumer’s equilibrium in case of a single commodity can be explained on the basis of the law of diminishing marginal utility. How does a consumer decide as to how much to buy of a good? It will depend upon two factors.

(a) The price she pays for each unit which is given and

(b) The utility she gets

 

CONSUMER’S EQUILIBRIUM IN CASE OF TWO OR MORE COMMODITIES

 

The law of diminishing marginal utility applies in case of one commodity only. But in real life a consumer normally consumes more than one commodity. In such a situation, law of equi-marginal utility helps in optimum allocation of his income. Law of equi-marginal utility is based on law of diminishing marginal utility. According to the law of equi-marginal utility a consumer will be in equilibrium when the ratio of marginal utility of a commodity to its price equals the ratio of marginal utility of other commodity to its price.

 

LIMITATION OF UTILITY ANALYSIS

In the utility analysis, it is assumed that utility is cardinally measurable, i.e., it can be expressed in quantitative term. However, utility is a feeling of mind and there cannot be a standard measure of what a person feels. So, utility cannot be expressed in figures.

 

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