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consumer equilibrium

consumer equilibrium
consumer equilibrium

What is the cardinal utility analysis? Discuss equilibrium of the consumer through utility analysis.

Meaning of cardinal utility :- Cardinal utility refers to cardinal numbers like 1, 2, 3, 4 etc. Cardinal utility are those numbers which can be added or subtracted.

In other words:- When we consume anything its utility measures in numbers like counting as 1,2,3,4,5, etc. Which can be increased and decreased in total utility.

Meaning of Equilibrium:- Consumer’s equilibrium refers to a situation wherein a consumer gets maximum satisfaction from his limited income. And he does not want any change in his existing expenditure.

However, here are some assumptions on which Consumer equilibrium utility analysis is based.

ASSUMPTIONS

  1. Rational Consumer:- Consumer is assumed to be rational.
  2. Cardinal Number:- Utility can be measured in cardinal numbers as 1,2,3,4 etc.
  3. Marginal Utility of money:- Money marginal utility has remained constant.
  4. Fixed income:- Income of the consumer remains constant.
  5. Fixed Price:- Price of the product remains constant.
  6. Tastes are Constant:- Taste of the consumer is also unchanged.
  7. Perfect Knowledge:- Consumer knows how to get maximum satisfaction from different goods by spending expenses out of his limited income.

Determination of Consumer Equilibrium

Consumer equilibrium can be ascertained under three different situation:

(I) A Single Commodity with one Use

(II) A single Commodity with Several Uses

(III) Several Commodity

(I) A Single Commodity with one Use:- In this situation a consumer who gets maximum satisfaction by consuming a single commodity with one use. When a consumer buys a commodity he makes a sacrifice in terms of price. So a rational consumer will consume the commodity up to a point where the marginal utility of the final unit of the commodity is equal to the marginal utility of money paid for it. Thus, consumers will get maximum satisfaction and will be in equilibrium.

Consumer’s equilibrium position is explained with the help of TABLE.

No. Of Commodity

(1)
MU of Commodity
          (2)
Utility of commodity in terms of Sacrifices(3)Utility Derived– Utility Sacrificed=(2 – 3)(4)
1
2
3
4
5
50
40
30
20
10
20
20
20
20
20
30
20
10
0
– 10

From the above table we can understand that when a consumer buys 1 unit of commodity then he gains 50 units of utility. So if he buys the next unit of commodity he reaches the 4th unit of commodity. Which provides him 20 units of utility as per the law of diminishing. So corresponding to it he sacrifices 20 rupee in terms of price. At this point he is in equilibrium. If he consumes 5th unit of commodity then he will gain 10 units of marginal utility. But here he will have to sacrifice 20 rupee of marginal utility of price. Thus, consumers will not be in equilibrium and not enjoy maximum satisfaction.

Now we can understand it through the figure consumer equilibrium

consumer equilibrium
consumer equilibrium

In this figure units of commodity are shown on X – axis and Marginal utility on Y– axis.

MU is the marginal utility of Commodity and PP is the marginal utility sacrifice in terms of commodity.

The consumer will be in equilibrium at point E where there 4th units of commodity is equal to its Price.

(II) A Single Commodity with Several Uses:- In this situation a consumer will be in equilibrium when he distributes different units of commodity in such a way that he gets equal marginal utility from each use.

We can understand Consumer Equilibrium in case of Single Commodity with Several Uses in the table.

Quantity of oilMU of oil in Stove MU of oil in Lantern
1
2
3
4
5
10
8
6
4
2
8
6
4
2
1

A consumer has 5 litres of kerosene oil. If a consumer consumes  1 litre of commodity. He gained utility from two things then he gained 10 units of utility from 1 unit of commodity. And from two he receives 8 units of utility. When he uses 5 litres of his oil for maximum utility. He will use 3 litres for Stove and 2 litres for the lantern. Then at the same time he will receive 6 units utility from Stove and as well as 6 units utility of lantern. Here consumers will be in equilibrium. This total utility of 10+8+6+8+6=38. Which will represent maximum satisfaction to the consumer.

If the 5th litre of oil is used as 4 litre on the stove and 1 litre on the lantern. Then his total utility will be as 10+8+6+4+8= 36. Which will be less than 2 units less than the previous distribution. Because 4 litre utility provides only 4 units utility which is not equal to the 1 litre of the utility as 8.

However it can be explained with the following figure consumer equilibrium

consumer equilibrium
consumer equilibrium

Figure shows that Marginal utility of kerosene oil in stove is shown by curve AB and Marginal utility of kerosene oil in lantern by curve EF.

Consumer has only 5 litres of oil.

If he uses 3 litre in Stove and 2 litre in lantern, he will get equal marginal utility from both the uses as shown by CD straight line.

The Consumer will be in equilibrium and get maximum satisfaction.

(III) Several Commodities

In some situations a consumer spends his income on different goods. Then he compares his marginal utility of the commodity of different goods with a view to get maximum satisfaction. As he spends his money on that commodity which yields him maximum marginal utility.

He will get maximum marginal utility where the last unit of money spent on different commodities yields him equal marginal utility. A consumer will have no desire to make any change in this position as he gets maximum satisfaction.

From the following table we can understand

Rupee SpentMU of good XMU of good Y
1
2
3
4
5
12
10
8
6
4
10
8
6
4
2

Consumer has 5 rupees.

As there are two goods.

Each price ₹1 per unit. Table indicates that the consumer will spend ₹3 on commodity X and ₹2 on commodity –y as he gets equal marginal utility as 8 units from the last unit of money so spent.

 In other words a consumer will be in equilibrium when the marginal utility of each commodity is equal.

Now we can understand by the following Figure

consumer equilibrium
consumer equilibrium

Figure shows that Consumer is equilibrium at point E where the consumer consumes 3 units of commodity –X and 2 units of Commodity –Y and

The marginal utility 8 of both the commodity is equal.

Conclusion:- Now we can understand that a consumer can be in equilibrium in three situations which are discussed above. As a single commodity with single use.

A single commodity with several uses and last Several Uses. However it can be understood properly with the help of figures.

Important Question of Economics

What is the cardinal utility analysis? Critical Examine the law of diminishing Marginal Utility.

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consumer equilibrium
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