Please refer to Economics Consumer Equilibrium Utility Analysis Class 12 Economics Notes and important questions below. The Class 12 Economics Chapter wise notes have been prepared based on the latest syllabus issued for the current academic year by CBSE. Students should revise these notes and go through important Class 12 Economics examination questions given below to obtain better marks in exams
Consumer Equilibrium Utility Analysis Class 12 Economics Notes and Questions
The below Class 12 Consumer Equilibrium Utility Analysis notes have been designed by expert Economics teachers. These will help you a lot to understand all important topics given in your NCERT Class 12 Economics textbook.
Question. Define Utility, Marginal Utility (MU) and Total Utility (TU)?
Ans. Utility refers to satisfaction level from the consumption of a product. In other words, utility means want satisfying power.
MU refers to addition in the TU from the consumption of one more unit of a product.
MU= TUn β TUn-1 or Ξππ / Ξπ
TU is the total satisfaction level to a consumer from the consumption of given quantity of a product. Thus, it is the sum of MU of all the units of product.
TU= MU1 + MU2 + MU3 +………… + MUn
= Ξ£MU
Law of Diminishing Marginal Utility
This law states that as a consumer consumes more and more units of a product, its marginal utility from the consumption of each successive unit goes on diminishing.
Example, A thirsty person gets highest marginal utility from first glass of water, less marginal utility from second and lesser from third, and so on.
This law is based on the following assumptions: –
1. There is no time gap between the consumption of each successive unit.
2. All the units of products consumed are homogenous in nature.
3. Each and every unit of the product consumed should be in its standard form.
4. There should not be any change in taste/ behaviour of consumer.
It is shown with the help of following schedule and diagram: –
Question. Explain the relationship between marginal utility and total utility.
Ans.
1. When marginal utility decreases, then total utility increases at diminishing rate. (In the table, it is shown 1-5 units of product)
2. When marginal utility is zero, then total utility is maximum and constant. (In the table, it is shown by 6th unit of product)
3. When marginal utility is negative, then total utility starts falling. (In the table, it is shown by 7th unit of product)
Consumer Equilibrium
Question. In case of single commodity using utility approach
OR
βGiven Market price of a good, how does a consumer decide units of that good to buy.β Explain.
Ans. Consumer equilibrium refers to that situation when a consumer attains maximum satisfaction level from his limited money income with no desire to change the way of his existing expenditure.
Utility approach consider following assumptions to explain consumer equilibrium: –
1. Rationality- It is assumed that consumer behave in a rational manner with an objective to attain maximum satisfaction.
2. Cardinal Utility- It means utility from the consumption of a product can be measured in terms of units.
3. Constant Marginal Utility of Money- utility from the unit of currency can be measured and remains constant.
In case of single commodity purchased by a consumer from his given income. Then, consumer equilibrium is attained where following two conditions are satisfied: –
(i) MU of the product in terms of money = price of the product (MUX(βΉ) =PX)
(ii) Law of Diminishing Marginal Utility is applicable.
Thus, MU decreases as consumption increases.
If condition of equality between equality between marginal utility and price is not satisfied, then following changes will arise: –
a) If MUX>PX, it means additional benefit from the consumption is more than additional cost. So, consumer will increase the consumption to attain maximum satisfaction. It will lead to decrease in marginal utility and consumer will increase the consumption till MUX=PX.
b) If MUX<PX, it means additional benefit from the consumption is less than additional cost. So, consumer will decrease the consumption to attain maximum satisfaction. It will lead to increase in marginal utility and consumer will decrease the consumption till MUX=PX.
It is explained with the help of following example and diagram: –
Let price of good X = βΉ5
MU of money i.e. MUm (1βΉ) = 4 utils
In the above tabular representation, consumer equilibrium is attained at 5 units of the product where marginal utility of the product in terms of money = price of the good.
Graphically, it is shown by point E with quantity OQ where MU curve intersects price line.
Question. Explain the concept of consumer equilibrium in case of two commodities using utility approach.
Ans. Consumer equilibrium refers to that situation when a consumer attains maximum satisfaction level from his limited money income with no desire to change the way of his existing expenditure. (where the consumer spends his money)
Utility approach consider following assumptions to explain consumer equilibrium: –
1. Rationality- It is assumed that consumer behave in a rational manner with an objective to attain maximum satisfaction.
2. Cardinal Utility- It means utility from the consumption of a product can be measured in terms of units.
3. Constant Marginal Utility of Money- utility from the unit of currency can be measured and remains constant.
In case of 2 commodities purchased by consumer from his given income then, consumer equilibrium is attained where following two conditions are satisfied: –
(i) Marginal Utility of all products from last rupee spent = Marginal Utility of money. In other words, per rupee Marginal Utility from both the products = Marginal Utility of money.
(ii) Marginal Utility decreases as consumption increases i.e. law of diminishing diminishing marginal utility is applicable.
It is explained with the help of following hypothetical example:
Let Price of Good X=βΉ2, Good Y=βΉ3, MU of Money=βΉ6 utils
If condition of equality between per rupee marginal utility of both products is not satisfied. Then following changes will arise.
(i) πππ₯ / ππ₯ > πππ¦ / ππ¦
It means per rupee utility from good X is higher than per rupee utility of good Y. So, consumer will consume more of X and less of Y. Hence, leading to decrease in MUX and increase in MUY. This will continue till
πππ₯/ππ₯ = πππ¦/ππ¦.
(ii) πππ₯/ππ₯ < πππ¦/ππ¦
It means per rupee utility from good Y is higher than per rupee utility of good X. So, consumer will consume more of Y and less of X. Hence, leading to decrease in MUY and increase in MUX. This will continue till
πππ₯/ππ₯ = πππ¦/ππ¦.
From the above table we can conclude that consumer will buy 5 units of Good X where πππ₯/ππ₯ = πππ and 4 units of good Y where πππ¦/ππ¦ = πππ
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