Class 12th Notes of Chapter 1 (Consumers & Consumers Equilibrium)

1. Consumer’s Behaviour & Equilibrium
MICRO ECONOMICS
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• Consumer’s Behaviour & Equilibrium
A. Consumer’s Behaviour B. Consumer’s Equilibrium
A. Consumer’s Behaviour
Meaning of
Utility
Meaning of
Utils
Concept of
TU & MU
Relationship b/w
TU & MU
Meaning of DMU Meaning of IC Features of IC Law of DMRS Price Line/
Budget Line
Indifference
Map
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1. Meaning of Utility –
The want satisfying power of the commodity is termed as Utility.
2. Meaning of Utils –
The unit of measuring consumer’s satisfaction is termed as Utils.
3. Concept of TU & MU –
A. TU (Total Utility) – It refers to the total satisfaction derived from consumption of a commodity.
TU = ∑MU
B. MU (Marginal Utility) – It refers to addition in TU due to one additional unit of consumption
MU = TUn – TUn-1
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4. Relationship b/w TU & MU
1. When TU increases at a diminishing rate, MU falls
2. When TU is maximum, MU is zero (0).
3. When TU falls, MU becomes – (ve) negative.
4. MU is derived from TU.
Units TU MU
1 10 10
2 18 8
3 24 6
4 28 4
5 30 2
6 30 0
7 28 -2
TU
MU
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5. LAW of DMU
According to this Law –
“As a consumer consumes more & more units of a commodity, MU derived from
additional units goes on falling i.e., the utility derived from each successive unit falls.”
Assumptions of LAW of DMU
1. Cardinal measurement of Utility
2. Standard unit of measurement
3. Continuous consumption
4. MU of rupee remains constant
5. Fixed income & price
MU
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6 & 7. Meaning & Features of IC
Features –
1. IC curve is always convex to the origin. (Reason : Law of DMRS)
2. IC curve slopes downwards towards right (Reason : Monotonic preferences)
3. IC curve never touches the axises.
4. Higher IC indicates higher level of satisfaction.
5. Two IC curve never intersect each other.
6. All the combinations lying on the same IC curve gives equal amount of satisfaction.
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Meaning of IC
The graphical presentation of Indifference schedule gives IC curve. This curve represents those
combinations of goods which gives consumer equal level of satisfaction.
Combination Apple Orange MRS
A 1 12 -
B 2 6 6
C 3 3 3
D 4 1 2
Apple
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8. Meaning of Indifference Map –
Set of Indifference curves is known as Indifference map.
Apple
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9. Law of DMRS –
MRS means the rate at which a consumer will forego (sacrifice) the successive units
of one good for a marginal increase of another good.
This rate of substitution goes on diminishing due to which IC is convex
10. Budget/Price Line –
This line shows all the possible combinations of two commodities good 1 & good 2,
which a consumer can actually buy at a given level of income & prices of two goods.
Comb G -1 G – 2
A 0 10
B 1 8
C 2 6
D 3 4
E 4 2
F 5 0
Consumers Income – 20
Price G – 1 : 4
Price G – 2 : 2
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B. Consumer’s Equilibrium
Utility Approach IC Curve Approach
Single Commodity Double Commodity
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Consumers Equilibrium Using Utility Approach –
Case 1 – Single Commodity
Meaning of C.E – C.E. refers to a situation in which a consumer spends his income on purchase of
commodity in such a way that gives him maximum satisfaction.
Condition for Equilibrium –
MUx = Px
Units TU MU Px
1 10 10 2
2 18 8 2
3 24 6 2
4 28 4 2
5 30 2 2
6 30 0 2
7 28 -2 2
C.E.
E P
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Consumers Equilibrium Using Utility Approach –
Case 2 – Double Commodity / Law of Equi – Marginal Utility
According to this law , a consumer gets maximum satisfaction when ratios of MU of two commodities to
their respective prices are equal.
Condition for Equilibrium –
MUx / MUy = Px / Py
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Consumers Equilibrium Using IC Approach –
To determine C.E. both the Price line & Indifference Map are combined
together.
At Equilibrium point, the conditions are –
1. Price line should be Tangent to the Indifference Map.
2. Indifference curve should be convex to the origin.
3. Slope of IC (MRS) should be equal to the slope of price line (Px /PY)
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Apple
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