Hence consumer will be in disequilibrium Consumers Equilibrium Two Commodity

# Hence consumer will be in disequilibrium consumers

This preview shows page 4 - 6 out of 10 pages.

Hence, consumer will be in disequilibrium. Consumer’s Equilibrium – Two Commodity Case In reality consumer spends his income on many goods. A rational consumer will be in equilibrium when he consumes that quantity of Good X and Y at which utility value of money price is equal to marginal utility of the commodities. Consumer’s Equilibrium – Two Commodity Case Suppose a consumer spends on two goods X and Y. Then he will be in equilibrium when, MU X = MU M X P X ……………… (i) MU Y = MU M X P Y………………. (ii) Or, MU X / P X = MU M and MU Y / P Y = MU M Or, MU X / P X = MU Y / P Y = MU M This is subject to money income of the consumer being constant. Consumer’s Equilibrium – Two Commodity Case The analysis is based on the assumption that individuals seek to maximize utility. Occurs when the consumer has spent all income and the marginal utilities per dollar spent on each good purchased are equal: where the letters A Z represent all the goods a person buys. Consumer’s Equilibrium Conditions Utility Approach MU x = P x in case of one commodity case MU x / P x = MU y / P y = MU m in case of two commodity case MU x / P x = MU y / P y = ……. = MU m in case of multiple commodity case
11/7/2015 5 Working of Consumer’s Equilibrium- 2 Commodity Case Suppose a consumer spends all his income and gets 10 units of X and 10 units of Y . If MU x = 30 utils MU Y = 20 utils and P X = Rs.1 P Y = Rs.1 Here, MU X / P X = 30/1 = 30 MU Y / P Y = 20/1 = 20 Therefore, MU X / P X > MU Y / P Y Since consumer is getting more satisfaction in X than Y, he will buy more of X than Y. Working of Consumer’s Equilibrium- 2 Commodity Case Since MU diminishes as the consumer buys more of X and MU rises as he buys less of Y, Now MU x = 25 utils MU Y = 25 utils and P X = Rs.1 P Y = Rs.1 Here, MU X / P X = 25/1 = 25 MU Y / P Y = 25/1 = 25 Therefore, MU X / P X = MU Y / P Y Since the satisfaction derived from X is equal to Y, he will be in equilibrium. Working of Consumer’s Equilibrium- 2 Commodity Case If the price of X and Y is different. Suppose a consumer spends all his income and gets 10 units of X and 10 units of Y . If MU x = 30 utils MU Y = 20 utils and P X = Rs.1 P Y = Rs.2 Here, MU X / P X = 30/1 = 30 MU Y / P Y = 20/2 = 10 Therefore, MU X / P X > MU Y / P Y Since consumer is getting more satisfaction in X than Y, he will buy more of X than Y. Working of Consumer’s Equilibrium- 2 Commodity Case Since MU diminishes as the consumer buys more of X and MU rises as he buys less of Y, Now MU x = 20 utils MU Y = 40 utils and P X = Rs.1 P Y = Rs.2 Here, MU X / P X = 20/1 = 20 MU Y / P Y = 40/2 = 20 Therefore, MU X / P X = MU Y / P Y Since the satisfaction derived from X is equal to Y, he will be in equilibrium. Cardinal Utility Theory : CRITICISM Utility is subjective Cardinal measurement of utility not possible specially in terms of money is not possible. Every commodity is not independent commodity.

#### You've reached the end of your free preview.

Want to read all 10 pages?