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Goods and services are brought by us in order to reach the highest level of satisfaction. That is called CONSUMERS EQUILIBRIUM.
(A point from where we won’t be willing to increase or reduce our

consumption)

How much of a commodity a consumer buys so that he maximizes his

satisfaction and attains the point of equilibrium ?????

To understand consumer behaviour, there are three important theories…
Cardinal Utility Approach of Alfred Marshall
Ordinal Utility Approach of J R Hicks
Revealed Preference Theory of Paul A Samuelson

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��Cardinal Utility Approach : Alfred Marshall �

According to Cardinal Utility Approach, utility is measurable in terms of numerical values.
Unit of measuring utility is ‘Utils’.
When utility is expressed in exact units like 1,2,3,4…etc.., it is called cardinal utility.

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TOTAL UTILITY AND MARGINAL UTILITY

Total Utility : Total amount of satisfaction obtained from consuming various units of a Commodity.

TU= ∑MU

Marginal Utility: Marginal utility is the additional utility obtains from an additional unit of any commodity consumed or acquired.
Change in total utility from the consumption of one additional unit of goods.

Mu_n= TU_n – TU _n-1

MU = ∆TU

∆Q

∆TU = Change in Total Utility

∆Q = Change in Quantity

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RELATIONSHIP BETWEEN �TOTAL UTILITY & MARGINAL UTILITY

When total utility increases at diminishes rate, marginal utility diminishes.

When total utility is maximum, marginal utility becomes zero.

When total utility decreases, marginal utility becomes negative.

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THE LAW OF DIMINISHING MARGINAL UTILITY

Hermann Heinrich Gossen was the first to formulate this law in 1854 though the name was given by Marshall.
Jevons called it as “Gossen’s First Law”
This law is framed from the characteristics of human wants that they are satiable. Hence it is also known as “The Law of Satiable Wants”

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ASSUMPTIONS OF THE LAW

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Marshall states this law as “The additional benefits which a person derives from a given increase of his stock of a thing deminishes with every increase in the stock he already has”.

For Example : If a person starts eating mangoes one after another the first mango gives him great pleasure.

When he takes more and more utility declines and after some time negative.

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MU curve is downward slopping because of the fact that consumption of successive units give lesser satisfaction

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When our hypothetical consumer takes the first orange he derives the maximum satisfaction in terms of 10 utils.
As he continues to consume the second, third, fourth and fifth units in succession, he derives less and less satisfaction 8,6,4,2 utils respectively.
With the consumption of the 6 th orange he reaches the SATIETY PONT. Because the satisfaction derived from that unit is ZERO.
Diagrammatically the curve MU is diminishing utility curve. It shows the MU diminishes as more and more units of a commodity(apple) are consumed till the satiety point C is reached.
Consumption of further units (7 th unit) give dis-utility or NEGATIVE UTILITY as shown by the movement of MU curve from point C downward below X axis.

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LIMITATIONS OF THE LAW

Homogeneous Units :
All units of the commodity should be of the same weight and quality. If, for example, the first apple is sour and the second sweet, the second will give greater satisfaction than first.
Continuity :
Units of the commodity should be consumed in succession at one particular time. For example, pieces of bread taken at random may increase utility.

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Suitable size units :
Units of a commodity are of a suitable size. Giving water to a thirsty person by spoons will increase the utility of the subsequent spoons of water.

Rational consumers :
The consumer should be an economic man who acts rationally. If he is under the influence of an intoxicant, say wine or opium, the utility of the later units will rise.

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Applicable to ordinary goods only :

Goods should be of an ordinary type. If they are commodities like diamonds and jewels or hobby goods like stamps, coins or paintings, the law does not apply.

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Importance of the Law

The LDMU is the basic law of consumption :

Law of Demand, the Law of Equi-Marginal Utility…are based on it.

It is helpful for the producers :
The changes in design, pattern and packing of commodities very often brought about by producers are keeping with this law. We want variety in soaps , toothpastes , pens…etc.. Thus this law helps in bringing variety in production.

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This law helps to explain the phenomenon that is why the price of a commodity falls when its supply increases. It is because with the increase in the stock of a commodity, its MU deminishes.
The principle of progressive taxation is based on this law.
As a persons income increases , the rate of tax rises because the MU of money to him falls with the rise in his income.

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CONSUMERS EQUILIBRIUM : �SINGLE COMMODITY MODEL

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Tabular presentation of consumers equilibrium:

For example :
Let x be the commodity a consumer intends to buy.
Px (Price of X) = Rs.4 , Mum= 4 utils

MU schedule of commodity x

UNITS OF COMMODITY X	MARGINAL UTILITY OF X (Utils)	MARGINAL UTILITY IN TERMS OF RUPEES WHEN 4 UTILS = Rs.1
1	20
2	18
3	16
4	10
5	0
6	-5

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Diagramatic presentation of� consumers equilibrium:

MUx(in Rs)

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Equilibrium is struck at point C when :
3 units of the commodity are purchased
here the price that the consumer willing to pay for a unit of the commodity exactly matches the price that he actually pays (4)
area ABC reflects CONSUMERS SURPLUS ( and it is maximum when he is in equilibrium)
It is equal to money saved by the consumer when :

Money value of Mux > Px

Price he is willing to pay = price he actually pays

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Consumer’s Equilibrium � (Two Goods Case)

This law is known by various names :

The Law of Equi-Marginal Utility

Law of Substitution
Law of Maximum Satisfaction
The Law of Indifference

Gossen’s Second Law

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Marshall defined the law as “If a person has a thing which he can put to several uses, he will distribute it among these uses in such a way that it has the same marginal utility in all.”

Every consumer has unlimited wants but the money income available for his disposal is limited.

To get maximum satisfaction, the consumer will compare the MUs of the different commodities he wants to buy and also the marginal utility of each commodity to its price.

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If he finds that the MU of good A is higher than that of good B, he will substitute the former for the latter till the MUs are equalized.

The consumer will thus go on substituting one good with a higher MU for another with a lower MU till the MU of each good is in proportion to its price, and the ratio of the prices of all goods is equal to the ratio of their MUs.

This is known as “Proportionality Rule” of consumers equilibrium.

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ASSUMPTIONS

The consumers are rational and want to achieve maximum satisfaction.
Utility is measurable in terms of money.
MU of money is constant.
Commodities are subjected to the Law of Diminishing Marginal Utility.
The taste and income of the consumer remains constant.

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Marginal Utility schedule of Good X & Y

Units of Commodities (X and Y)	Marginal Utility of X	Marginal Utility of Y
1	20 (1st Rupee)	16 (3rd Rupee)
2	18 (2nd Rupee)	14 (5th Rupee)
3	16 (4th Rupee)	12 (7th Rupee)
4	14 (6th Rupee)	10
5	12 (8th Rupee)	8
6	10	6
7	8	4
8	6	2

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Assumption: Px = Py = Rs.1 per unit.
Now the consumer plans to allocate his Rs.8 between commodity X and Y. Let us see how much money he spends on each commodity. Table 3 shows how the consumer spends his income on both the commodities.
Since the first unit of commodity X gives the highest utility (20 utils), he spends the first Rupee on X. Second Rupee also goes to commodity X as it gives 18 utils (the second highest). Both the first unit of commodity Y and the third unit of commodity X give the same amount of utility. However, the consumer prefers to buy commodity Y because has already spent two Rupees on commodity X. Similarly, the fourth Rupee is spent on X, fifth Rupee on Y, sixth Rupee on X, seventh Rupee on Y and eighth Rupee on X.

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In this manner, the consumer consumes 5 units of commodity X and 3 units of commodity Y. In other words, 5 units of commodity X and 3 units of commodity Y leave him with the same amount of marginal utility. Therefore, according to the law of equi-marginal utility, the consumer is at equilibrium at this point. Furthermore, this is point at which the consumer experiences maximum satisfaction. Let us calculate the total utility of commodities consumed to understand this.
Total utility = TU_{X + Y}= TU_X + TU_Y = (20 + 18 + 16 + 14 + 12) + (16 + 14 + 12) = 122
Any other combinations of commodities would have left the customer with less total utility. This is a simple hypothetical illustration to explain how consumer’s equilibrium is attained with the concept of equi-marginal utility.

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PRACTICAL IMPORTANCE OF THE LAW

Consumption :
Every consumer want to get maximum satisfaction. The law explains as to how a consumer maximizes his satisfaction from his limited recourses.

Production :
To maximize profit, producers will substitute one factor for the other till the marginal productivity of all factors are equal.

Optimum allocation of the recourses can be possible by applying this principle.

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