Consumers Equilibrium and Demand Test - 3

The ordinal utility theory or the indifference curve analysis is based on four main assumptions.

1.Rational behavior of the consumer.

2.Utility is ordinal.

3.Diminishing marginal rate of substitution.

4.Consistency in choice. 

Substitute goods are those goods that can satisfy the same necessity, they can be used for the same end.

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.

Approch is for an individual consumer, market has nothing to do with it.

Marginal utility is rate of change of total utility with respect to consumption of a commodity.so it is an addition to total utility resulting from a unit change in total utility.

Average utility is nothing but utility derived by per unit of consumption.

The law of diminishing marginal utility states that marginal utility declines as consumption increases. Because demand price depends on the marginal utility obtained from a good, price also declines as consumption increases, meaning price and quantity demanded are inversely related, which is the law of demand.

utility represents satisfaction experienced by the consumer from a good.

MU is the concept used in cardianl utility approch which was given by alferd marshal.

buyer and consumer is the same person.