This document discusses consumer equilibrium and the concepts of utility, marginal utility, and indifference curves. It explains that consumer equilibrium is reached when marginal utility per rupee spent is equal across all goods, or when the indifference curve is tangent to the budget line. The budget line shows affordable combinations of two goods given prices and income, while indifference curves represent different satisfaction levels. Consumer equilibrium maximizes utility subject to the budget constraint.

1. Consumer’s equilibrium

2. What is Utility and its concepts?
• Satisfying power of a commodity
Total utility
• Sum total of utilities derived from consumption of all units
Marginal utility
• change in utility
• Additional utility derived after consuming one additional unit
• Mathematically expressed as 𝐌𝐔 = 𝐓𝐔 𝐧 − 𝐓𝐔 𝐧−𝟏

3. What is the relationship between total utility
and marginal utility?
1. TU increases at increasing rate,
MU increases.
2. TU increases at decreasing rate,
MU decreases
3. TU reaches maximum, MU is zero
4. TU decreases, MU negative 2 4 6 8
-5
0
5
10
15
20
25
Total Utility
Marginal Utility
Quantity
TU,MU

4. What is the law of diminishing marginal utility?
• Also known as “fundamental law of satisfaction” ; “fundamental
psychological law”.
• States that “as more and more standard units of a commodity are
continuously consumed, MU derived from every additional unit must
decline.”

5. How consumer equilibrium can be attained in a
single commodity case?
Purchase of a commodity depends on:
1. Price of the commodity
2. Marginal (and total utility) of the
commodity
3. Marginal utility of money (assumed to be
constant)
Equilibrium at the point where
𝐌𝐔 𝐦 =
𝐌𝐔 𝐱
𝐏 𝐗
2 4 6 8
-10
0
10
20
30
40
MUX
MUM
Quantity
MUX,MUM

6. However, in a two commodity case….
• Equilibrium will be reached at
𝐌𝐔 𝟏
𝐏𝟏
=
𝐌𝐔 𝟐
𝐏𝟐
= ⋯ =
𝐌𝐔 𝐧
𝐏 𝐧
= 𝐌𝐔 𝐦
• The marginal utility derived from last rupee spent should be equal to the
amount spent on other commodities

7. Consumer equilibrium using Indifference curve
approach can be calculated as…
• Indifference curve analysis uses ordinal
approach
• Indifference curve shows different
combinations of two commodities
between which a consumer is
indifferent.
• Slope: marginal rate of substitution
which is decreasing from left to right
0 1 2 3 4 5
0
5
10
15
Good A
GoodB

8. What are the properties of indifference curve?
1. IC are convex to the origin, so that MRS tends to diminish.
2. IC are negatively sloped, or they slope downward.
3. IC never touch/intersect each other.

9. On the other hand, budget line
• Budget line shows different possible
combinations of good 1and good 2,
which a consumer can buy, given his
budget and the prices of good 1 and
good 2.
• Consumer spends all his income on
any point on the budget line
• Mathematically,
Px. X + Py . Y = M
0 10 20 30 40
0
20
40
60
80
Good A
GoodB

10. When can budget line rotate?
• Decrease/ increase in price of
good A.
• Decrease/ increase in price of
good 2.
0 10 20 30 40
0
20
40
60
80
Good A
GoodB
0 10 20 30 40
0
20
40
60
80
Good A
GoodB

11. Consumer’s equilibrium
• At the point where indifference
curve and budget line are tangent
to each other.
• Mathematically,
𝐌𝐑𝐒 𝐗𝐘 = −
𝐌𝐔 𝐗
𝐌𝐔 𝐘 0 10 20 30 40
0
20
40
60
80
Good A
GoodB

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