Consumer's Equilibrium And Demand Class 11 Notes Economics Chapter 5 - CBSE
Chapter : 5
What Are Consumer's Equilibrium And Demand ?
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Consumer
Consumer are economic agents who utilise commodities and services to directly fulfil their desires.
Concept Of Utility
Utility can be defined as the amount of satisfaction derived from the consumption of a commodity or it refers to wants statisfying power of a commodity.
Features Of Utility
- Utility is subjective
- Utility is not measurable
- Utility is relative in nature
- Utility is different from usefulness
Utility
Total Utility
- It refers to the sum total of utilities derived from the consumption of different units of a commodity.
TU = ∑MU
Marginal Utility
- It refers to the additional utility derived from the consumption of an additional units of a commodity.
MU = TUn − TUn−1
Measurement Of Utility
Cardinal Measurement of Utility
- As per this approach, Utility can be measured in terms of cardinal numbers, or units like 1,2,3.
Ordinal Measurement of Utility
- As per this approach, Utility cannot be measured in terms of units or numbers but can only be ranked, such as high or low.
Relationship Between Total And Marginal Utility
When total Utility is
- Increasing at a decreasing rate
- At the maximum
- Decreasing
Then marginal Utility is
- Decreasing, but is positive
- Zero
- Negative
Law Of Diminishing Marginal Utility
Law of Diminishing marginal utility states that as the amount consumed of a commodity increases, other things being equal, the utility desired by the consumer for the additional units, goes on decreasing.
Assumptions of the law
- All units are identical and standard in unit
- No change in taste
- Continuity in consumption
- Utility is measurable
Consumers’ Equilibrium
It refers to a situation when a consumer gets maximum satisfaction by spending out of his income on goods and services without making any change in his existing expenditure.
Assumptions related to Consumer Equilibrium
- It is assumed that consumer is rational
- It is assumed that utility can be measured in cardinal numbers
- It is assumed that utility of a commodity is not affected by consumption of other goods
- It is assumed that marginal utility of money remains constant
Methods Of Attaining Consumer Equilibrium
(Cardinal Utility Analysis)
One Commodity Apporach
Say commodity X, where, MUx = Px
$$\text{Then,\space}\frac{\text{MU}_{x}}{\text{P}_{x}} =\text{MU}$$
percent of money
Two Commodity Apporach/law Of Equi-marginal Utility
Good 1 = x, Good 2 = y
$$\frac{\text{MU}_{x}}{\text{P}_{x}} = \frac{\text{MU}_{y}}{\text{P}_{y}}=\text{MU}$$
per unit of money
Condition: Here, consumer will be in equilibrium when he spends his entire income.
Conditions Of Consumer Equilibrium
- Rupee worth of satisfaction should be the same across all goods purchased and equal to marginal utility of money.
- Marginal utility of money remains constant.
- Law of Diminishing marginal utility applies.
Consumer’s Equilibrium: Indifference Curve Analysis
Consumer’s Budget
The consumer budget is the actual amount of money that a customer has to spend in order to combine two different types of goods.
Budget Set
It is a combination of various sets of two items that aids in drawing the budget line.
Budget Line
A budget line shows various combinations of two commodities which can be purchased with a given budget at given prices of the two commodities.
Indifference Curve
An indifference curve refers to a curve that shows combinational of two goods which give equal amount of satisfaction to a consumer.
Indifference Set
It describes as a combination of products combined in a way that provides the consumer with an equivalent level of satisfaction.
Indifference Map
It refers to a group or set of indifference curves each one of which represents a given level of satisfaction.
Properties Of Indifference Curve
- An indifference curve slopes downward from left to right or is negatively sloped.
- An indifference curve is convex to the point of origin.
- Higher indifference curve yields higher satisfaction.
- Two indifference curves can never intersect each other.
Marginal Rate Of Substitution
Marginal rate of Substitution (MRS) is the rate at which the consumer is willing to substitute one good to obtain another without changing the level of satisfaction.
Consumer’s Equilibrium Through Indifference Curve Approach
According to the indifference curve approach, a customer will be in equilibrium when the slope of Budget line is equal to the indifference curve.
Assumptions Of IC Analysis Of Consumer Equilibrium
- It is assumed that the consumer has a set amount of money to spend on two items, given the market prices of the products.
- It is presumed that the customer is still not full. They prefer more of both good at all times.
- The degree of satisfaction with each package of items can be used by the consumer to rank their choices.
- It is believed that the marginal rate of substitution is declining.
- The consumer is an intelligent person who aims to enhance their level of enjoyment.
Theory of Demand
Demand
Demand for a commodity refers to the possible quantities of a commodity which consumer is willing and able to purchase at various possible prices during a particular period of time
Quantity Demanded
It refers to the specific quantity purchased of a commodity against a specific price of that commodity.
Determinants Of Demand
Price of the Commodity (Px)
- P↑ D↓
- P↓ D↑
Income of Consumer (Y)
Generally,
- I↑ D↓
- I↓ D↑
- Superior Goods
- I↑ D↑
- I↓ D↓
- Inferior Goods
- I↑ D↑
- I↓ D↓
- Inexpensive Necesseties
- With increase in income demand increases upto an extent, then constant.
Consumers’ Tastes and Preferences (T)
Prices of Related Goods (Pr)
- Substitute Goods
Say X and Y are substitute goods.
Then, Px↑ Dy↑
- Complimentary Goods
Say X and Y are complementary goods.
Then, Px↑ Dy↓
Demand Function
It shows functional relationship of demand with its determinants.
Dn = f (Px , Pr ,........Y, T, E)
Demand Schedule
It refers to the tabular statement that shows different quantities of a commodity that would be demanded at various prices during a given period of time.
Individual Demand Schedule
It refers to the tabular representation of various quantities of a commodity that would be demanded by an individual at different
prices during a particular period of time.
Market Demand Schedule
It refers to the tabular representation of various quantities of a commodity that would be demand by all household in the market at various possible prices during a particular period of time.
Demand Curve
Graphical representation of Demand Schedule.
Individual Demand Curve
- It is the graphical representation of Individual demand schedule.
Market Demand Curve
- It is the graphical representation of Market demand schedule.
Law Of Demand
Statement of Law
The law of demand states that, the quantity demanded of a commodity increases when its price falls and decreases when its price rises while the other factors remain constant
Some Assumptions of Law
- It is assumed that there is no change in income.
- It is assumed that there is no change in tastes and preferences of consumer.
- It is assumed that there is no change in price of related goods.
- It is assumed that there is no consumer expectations.
Reasons for Downward Slope of Demand Curve
- Law of Diminishing Marginal Utility
- Income Effect
- Substiution Effect
- Increase in number of Consumers
- Several uses of a commodity
Exceptions to the law of Demand
- Giffen Goods
- Extravagant spending
- Expections about future prices
- Emergencies
Movement along a demand curve and shift of Demand Curve
Change in Quantity Demanded
Movement along a Demand Curve
Expansion of Demand
- Cause by decrease in price of commodity
- Downward movement
Contraction of Demand
- Cause by increase in price of commodity
- Upward movement
Change in Demand
Shift in Demand Curve
Increase in Demand
- Rightward or forward shift of curve
Decrease in Demand
- Leftward or backward shift of curve
Cause by factors other than its own price
Price Elasticity Of Demand
Price Elasticity of Demand may be defined as the degree of responsive of quantity demanded of a commodity in response to a change in its own price.
Degree of Price Elasticity of Demand
Perfectly Inelastic Demand
- Ed = 0
- Quantity demanded does not change with change in price.
Inelastic Demand
- Ed < 1
- Quantity demanded changes by a smaller percentage change in price.
Unitary Elastic
- Ed = 1
- Quantity demanded changes exactly at the same rate as change in price.
Elastic
- Ed > 1
- Quantity demanded changes by a larger percentage than change in price.
Perfectly Elastic
- Ed = ∞
- Consumer are ready to all units at a particular price but not at all at higher prices.
Methods Of Measuring Price Elasticity Of Demand
Percentage Method
$$\text{E}_{d}=\\-\frac{\text{Percentage Change in Quantity Demanded}}{\text{Percentage Change in Price}}$$
$$\text{E}_{d}=-\frac{\Delta \text{Q}}{\Delta \text{P}}×\frac{\text{P}}{\text{Q}}$$
Total Expenditure Method
| Change in Price | |||
| Unitary Elastic (ed = 1) | Inelastic (ed < 1) | Elastic (ed > 1) | |
| Fall in Price | TE is constant | TE falls | TE Rises |
| Rise in Price | TE is constant | TE rises | TE falls |
TE = Total Expenditure
Factors Affecting Price Elasticity Of Demand
- Availablity of Substitutes
- Nature of the Commodity
- Proportion of income spent
- Number of uses of a commodity
- Time factor
- Possibility of Postponement of consumption
- Price Range
- Habits of Consumer
- Income of Consumer
