Explain the condition of consumer’s equilibrium with the help of utility analysis.
Consumer’s Equilibrium in case of Single Commodity:
The Law of Diminishing marginal utility can be used to explain consumer’s equilibrium in case of a single commodity.
A consumer purchasing a single commodity will be at equilibrium, when he is buying such a quantity of that commodity, which gives him maximum satisfaction. The number of units to be consumed of the given commodity by a consumer depends on 2 factors:
1. Price of the given commodity;
2. Expected utility (Marginal utility) from each successive unit.
To determine the equilibrium point, consumer compares the price (or cost) of the given commodity with its utility (satisfaction or benefit). Being a rational consumer, he will be at equilibrium when marginal utility is equal to price paid for the commodity.
Hence the consumer attains equilibrium when, Marginal Utility of a Rupee spent on the commodity = Marginal Utility of Money
When the price of a good rises from Rs 20 per unit to Rs 30 per unit, the revenue of the firm producing this good rises from Rs 100 to Rs 300. Calculate the price elasticity of supply.
| Units of labour | Average Product (Units) | Marginal Product (Units) |
| 1 | 8 | - |
| 2 | 10 | - |
| 3 | - | 10 |
| 4 | 9 | - |
| 5 | - | 4 |
| 6 | 7 | - |
Explain the law of diminishing marginal utility with the help of a total utility schedule.
