Explain the conditions of consumer's equilibrium in case of (1) single commodity and (2) two commodities. Use utility approach.
Answers to your Questions 6, 7 & 8 are provided as below
Rise in Price of Related Goods : The related goods can be classified into following two categories.
- Substitute Goods- Substitute goods refer to those goods that can be consumed in place of each other. For example, tea and coffee. In case of substitute goods, if the price of one good increases, the consumer shifts his demand to the other (substitute) good i.e. rise in the price of one good results in a rise in the demand of the other good. In this case, the demand curve shifts parallely outwards to the right.
In the above diagram, as a result of rise in price of coffee, the demand for tea increases and the demand curve for tea shifts from D 1 D 1 to D 2 D 2.
- Complementary Goods - Complementary goods refer to those goods that are consumed together. The joint consumption of these goods satisfies wants of the consumer. For example: ink and ink pens. In case of complementary goods, if the price of one good increases then a consumer reduces his demand for the complementary good as well, i.e. a rise in the price of one good results in a fall in demand of the other good. In this case, the demand curve shifts parallely inwards to the left.
In the above diagram, as a result of rise in price of ink pens, the demand for ink falls and the demand curve for ink shifts from D 1 D 1 to D 2 D 2
Ans - 7
Every economy faces three central problems due to scarce availability of resources. This scarcity
challenges the best possible usage of these available resources to full the unlimited demands. The
three central problems of an economy are as follows:
What to Produce, How to Produce & For whom to produce.
How to produce?
Next problem arises regarding how to produce which means that deciding the technic whether to produce goods with manuals labour or with the use of a machine. Which of the available technology should be adopted for this.
Consumer's equilibrium in case of single commodity determines the units of a commodity that he will buy for a particular market price of the commodity.
In Case of Single Commodity
In case of a single commodity, a consumer attains equilibrium when the utility derived from each additional unit of the rupee spent on the commodity becomes equal to the Marginal Utility of Money. In other words, the consumer attains equilibrium when,
Marginal Utility of a Rupee spent on the commodity = Marginal Utility of Money
Marginal Utility of a Rupee spent on the commodity- It refers to the utility that is derived from the additional unit of rupee spent on the commodity
Marginal Utility of Money (MUM)- It refers to the valuation of a unit of rupee. It is assumed to be constant. Thus, consumer’s equilibrium is attained where,
In the figure, MUm curve is a horizontal straight line (parallel to the x-axis) representing constant Marginal Utility of Money. MUx curve is downward sloping representing diminishing Marginal Utility of X. The consumer attains consumer's equilibrium at point E, where, the Marginal Utility of a Rupee spent on X is equal to the Marginal Utility of Money.
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in case (1).a consumer purchage single commodity will be equlibrium when he is buying such quantity of that commodity which give him maximum satisfiction.eg. aman want to buy a good price of that is 10 it get satisfiction when utility is equal torupess 10 in case 2. under this case consumer gets maximum satisfiction when ratio of Muof two goods are equal
consumer equilibrium in cas of single commodity:- consumer equilibrium is that state of consumer demand which he things to be the best and which he does't want to alter. teh law of consumer equilibrium is appply when marginal utility and price of a good will be same. therefore, consumer equilibrium depends upon behavior of consumer. marginal utility of money: marginal utility of X commodity/ price of X commodity.
consumer equilibrium in case of two commodities:- it states that a consumer will so allocate his expenditure in such a manner that utility gain from the last rupee spend on each commodity is equal. taht mean marginal utility of money=marginal utility of X commodity/ price of X commdity=marginal utility of Y commodity/ price of Y commodity.
utility is of two types:-
1. marginal utility
2. total utility
it is measured in terms of utils.