Consumer's Equilibrium and Demand Class 11 Notes

Utility is the want-satisfying power of a good, the satisfaction a consumer gets from consuming it. It is a subjective notion, not a physical quantity, and in this part of the syllabus it is treated as measurable in imaginary units called utils.Total utility is the sum of the satisfaction from all units consumed; marginal utility is the addition to total utility from consuming one more unit. The two are tied by the relationship TU = sum of MU, and MU = change in TU ÷ change in quantity.

As a consumer takes more and more units of a good, the utility derived from the successive units goes on falling. The law assumes a single good, continuous consumption, constant quality, taste and income, and rationality. It is the foundation of the downward-sloping demand curve: since extra units yield less utility, the consumer will buy more only at a lower price.

• Statement: each successive unit of a commodity consumed gives less utility than the previous one.
• Assumptions: the units are homogeneous, consumption is continuous, the consumer's taste and income are unchanged, and the price of the good does not change.
• Importance: it explains why the demand curve slopes downward and why consumers value extra units less.
• Exception: money and hobbies — the marginal utility of money does not fall so readily, and absorption (an unusual or scarce item) can temporarily raise utility.

The consumer reaches equilibrium when the income is so spent that marginal utility equals price for each good and the last rupee spent on every good brings the same utility. At that point the consumer has no incentive to change the combination because any reallocation would lower total satisfaction.

• If MUx ÷ Px > MUy ÷ Py: the last rupee on X yields more than on Y, so buy more X and less Y.
• If MUx ÷ Px < MUy ÷ Py: shift spending from X to Y.
• Equilibrium: the equality holds, marginal utility of money equals the utility rupee for rupee, and total utility is maximum.
• Alternative statement: MU of a good = its price, in real units — the consumer stops buying when the extra satisfaction equals the price paid.

An indifference curve joins all the combinations of two goods that give the consumer the same level of satisfaction, so the consumer is indifferent among points on it. It abandons the measurable-utility fiction and works only with preferences and marginal rate of substitution (MRS), the rate at which one good is sacrificed for another along the curve.

• An IC is downward sloping: to get more of X the consumer must give up some Y, since both give satisfaction.
• An IC is convex to the origin: MRS falls as more X is taken, because X becomes relatively more abundant.
• Higher IC, higher satisfaction: a curve farther from the origin contains combinations of more of both goods.
• Two ICs never intersect: an intersection would place two distinct satisfaction levels at one point.
• An IC never touches the axes: a single good gives limited satisfaction, so a corner combination of one good only cannot match the interior combinations.

The budget line shows the combinations of two goods the consumer can buy by spending the whole income at given prices. Its slope is the ratio of the prices. The consumer is in equilibrium where the budget line touches the highest attainable indifference curve, and at that point the slope of the IC equals the slope of the budget line.

Demand is the quantity of a good that a consumer is willing and able to buy at a given price over a period. It is not mere desire — desire without the ability to pay is want, not demand. The law of demand states that, other things remaining the same, the quantity demanded of a good falls as its price rises and rises as its price falls, so price and quantity are inversely related.The demand schedule lists price-quantity pairs; the demand curve plots them and slopes downward. A change in price moves along the curve, a change in any other determinant shifts the whole curve.

• Determinants of demand: own price, income of the consumer, prices of related goods, tastes and preferences, expectations about the future and the number of consumers.
• Normal good: demand rises with income. Inferior good: demand falls as income rises.
• Substitutes, of tea and coffee: a rise in the price of one raises the demand for the other.
• Complements, of pen and ink: a rise in the price of one lowers the demand for the other.
• Movement along the curve: caused by a change in the price alone.
• Shift of the curve: caused by any change in a determinant other than price — income, tastes, related goods or expectations.

Price elasticity of demand measures the responsiveness of quantity demanded to a change in the price. It is the ratio of the percentage change in quantity demanded to the percentage change in price, and it takes five degrees from perfectly inelastic to perfectly elastic. It is the concept behind decisions on pricing, taxation and revenue.

• Perfectly inelastic (E = 0): quantity does not change at all as price changes — life-saving medicine.
• Relatively inelastic (E < 1): quantity changes less than price does — necessities like salt.
• Unitary elastic (E = 1): quantity changes exactly proportionately.
• Relatively elastic (E > 1): quantity changes more than price does — luxuries, branded goods.
• Perfectly elastic (E = ∞): any rise in price destroys demand, any fall draws infinite demand — a single firm in perfect competition.
• The geometric trick: on a straight-line demand curve, E = lower segment ÷ upper segment from the given point.
• Total expenditure test: a price fall raises total expenditure when demand is elastic, leaves it unchanged when unitary, and lowers it when inelastic.

The unit is examined through definitions, the equilibrium conditions, the demand-curve diagrams and elasticity computations. The numerical elasticity question trades directly on the percentage formula, and the diagram questions on the TU–MU pair and the indifference-curve equilibrium.

• Define utility, TU, MU, demand, the law of demand, substitutes, complements, and the degrees of elasticity.
• State and explain the consumer's equilibrium by both the utility and the IC analyses, with their conditions.
• Draw and interpret the TU and MU curves, the indifference curve with its properties, and the budget line.
• Distinguish movement along a demand curve from a shift of it, with a cause and an example.
• Compute price elasticity from a given schedule by the percentage method and by the total expenditure method.
• On a straight-line demand curve, apply the segment method E = lower ÷ upper.