Consumers Equilibrium and Demand Test - 12

Marginal utility in consumer theory represents the additional satisfaction or happiness a consumer derives from consuming one more unit of a good. It helps in understanding how consumers make choices to maximize their utility.

Utility represents satisfaction experienced by the consumer from a good.

An increase in consumer income generally leads to an increase in the demand for normal goods, as consumers have more purchasing power and can afford to buy more of these goods.

A horizontal demand curve indicates perfectly elastic demand, where the quantity demanded remains constant regardless of changes in price. This situation occurs when consumers are willing to purchase any quantity of the good at the given price but no more at any higher price.

At the point of tangency between an indifference curve and the budget constraint (price line), the slope of the indifference curve (representing the marginal rate of substitution) equals the slope of the price line (representing the relative price of goods). This implies that the consumer is allocating their expenditure in a way that the additional utility obtained from consuming one more unit of a good is equal to the additional cost of sacrificing units of the other good. Therefore, at this point, the slope of the indifference curve is the same as the slope of the price line, ensuring utility maximization given the budget constraint.

The cross elasticity of demand quantifies how the quantity demanded of one good responds to a change in the price of another related good. It indicates whether the two goods are substitutes or complements. If the cross elasticity is positive, it suggests that the goods are substitutes, meaning an increase in the price of one leads to an increase in demand for the other. Conversely, a negative cross elasticity indicates that the goods are complements, so an increase in the price of one reduces the demand for the other.

Suppose a consumer is willing to pay Rs.10 for a commodity but it's price is Rs.6, we say that consumer's surplus is Rs. 4. As per the concept of consumer surplus, a consumer is in equilibrium where consumer surplus is zero. Referring to above example when price of commodity is Rs.10 and consumer's surplus is zero, the consumer is said to be in equilibrium.

\(E_d=1, Q=40, P=1, Q_1=36, P_1=? \)

\(E_d=-\frac{\Delta Q}{\Delta P} \times \frac{P}{Q} \)

\(1=-\frac{(-4)}{\Delta P} \times \frac{1}{40} \)

\(\Delta P=0.1 \)

\(\Delta P=P_1-P \)

\(0.1=P_1-1 \)

\(P_1=1.1 \)

\(\Delta Q=Q_1-Q \)

\(\Delta Q=36-40 \)

\(\Delta Q=-4\)

At a price of Rs 1.1 household will demand \(36 kg\) of wheat.

Indifference curves represent various combinations of two goods that offer the same level of satisfaction. They have a negative slope, indicating the trade-off between goods. These curves cannot intersect because each curve represents a unique level of utility, and intersecting curves would violate the concept of indifference.

A decrease in demand and an increase in supply will cause a fall in Equilibrium price.

Equilibrium is a state of no change and clearly, at the equilibrium price, both buyers and sellers are in a state of no change.