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    Cardinal Approach To Consumers Equilibrium

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    Thanupa Kopparapu
    The cardinal approach measures utility in quantitative values called "utils" and suggests utility can be measured monetarily by how much a consumer is willing to pay. For a single commodity, consumer equilibrium occurs when marginal utility from additional units equals price, as this maximizes satisfaction under the consumer's budget constraint. Diminishing marginal utility explains why after reaching the equilibrium point, further consumption would decrease satisfaction. The assumptions are that utility can be measured cardinally and monetarily, consumption is of reasonable quantity, it is continuous, the consumer is rational, and utilities and income are fixed.

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    Cardinal Approach To Consumers Equilibrium

    Uploaded by

    Thanupa Kopparapu
    51 views7 pages
    The cardinal approach measures utility in quantitative values called "utils" and suggests utility can be measured monetarily by how much a consumer is willing to pay. For a single commodity, consumer equilibrium occurs when marginal utility from additional units equals price, as this maximizes satisfaction under the consumer's budget constraint. Diminishing marginal utility explains why after reaching the equilibrium point, further consumption would decrease satisfaction. The assumptions are that utility can be measured cardinally and monetarily, consumption is of reasonable quantity, it is continuous, the consumer is rational, and utilities and income are fixed.

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    Cardinal approach to consumers equilibrium

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    The cardinal approach measures utility in quantitative values called "utils" and suggests utility can be measured monetarily by how much a consumer is willing to pay. For a single commodity, consumer equilibrium occurs when marginal utility from additional units equals price, as this maximizes satisfaction under the consumer's budget constraint. Diminishing marginal utility explains why after reaching the equilibrium point, further consumption would decrease satisfaction. The assumptions are that utility can be measured cardinally and monetarily, consumption is of reasonable quantity, it is continuous, the consumer is rational, and utilities and income are fixed.

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    © All Rights Reserved
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    Download as pdf or txt
    51 views7 pages

    Cardinal Approach To Consumers Equilibrium

    Uploaded by

    Thanupa Kopparapu
    The cardinal approach measures utility in quantitative values called "utils" and suggests utility can be measured monetarily by how much a consumer is willing to pay. For a single commodity, consumer equilibrium occurs when marginal utility from additional units equals price, as this maximizes satisfaction under the consumer's budget constraint. Diminishing marginal utility explains why after reaching the equilibrium point, further consumption would decrease satisfaction. The assumptions are that utility can be measured cardinally and monetarily, consumption is of reasonable quantity, it is continuous, the consumer is rational, and utilities and income are fixed.

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    CARDINAL

    APPROACH TO
    CONSUMERS
    EQUILIBRIUM
    BY ZAARA AND THANUPA - ECONOMICS GROUP 5
    CONCEPTS OF Utility and CONSUMER’S EQUILIBRIUM:
    ● A consumer is an individual that buys goods and
    services to satisfy his wants.
    ● services.
    ● main objective - to maximise satisfaction from
    spending his income on various goods and
    services.
    ➔ Utility : a term in economics that refers to
    the want satisfying capacity a commodity
    has.
    ➔ It’s the level of satisfaction a consumer
    ★ “Consumer’s equilibrium” refers to a
    achieves from consumptions of goods
    situation under which a consumer spends his and services.
    entire income on purchase of goods and
    services in such a manner that gives him
    maximum satisfaction and he has no tendency
    to change it.
    Cardinal Approach:
    ● In economics, there are two approaches to study consumer’s equilibrium :

    1. Cardinal Utility Approach - also known as Marshal’s analysis or marginal utility


    analysis
    2. Ordinal Utility - also known as the Hicksian or Indifference Curve analysis.

    ★ The Cardinal utility Approach


    - According to the Cardinal Approach, it is possible to measure utility
    obtained from consumption of a certain quantity of a commodity, in
    numerical / quantitative values.
    ★ These values are known as “utils”.

    ★ Hence, economists suggested that the measurement of utility is in monetary terms,


    and that utility is measured in terms of money that the consumer is willing to pay.

    ➔ Consumer’s Equilibrium can be addressed in two situations :


    1. When the consumer spends his entire income on a single commodity
    2. When the consumer spends his entire income on two commodities
    ● The law of Diminishing Marginal Utility can be used to explain this
    situation of consumer’s equilibrium.

    ● The law states that “as we consumer more units of a given commodity,
    the utility derived from each successive unit consumed will go on
    0OBJECTIVES diminishing.”
    All assumptions of law of DMu are taken as assumptions of Consumer’s
    C
    ●
    Equilibrium in case of single commodity.

    Assumptions :
    CONSUMER’S 1. Measurement is both cardinal and monetary
    EQUILIBRIUM IN 2. Consumption of reasonable quantity
    3. Continuous consumption
    CASE OF SINGLE 4. Rational consumer
    COMMODITY 5.
    6.
    Independent and constant utilities
    Fixed income and prices

    ● As a rational consumer, an individual will want to


    purchase a quantity of a commodity that will
    obtain maximum satisfaction. To do so, he must
    consider two factors :
    1. Price of the commodity
    2. Marginal Utility derived from each
    successive unit
    EQUILIBRIUM CONDITION
    ● Consumer’s equilibrium in case of a single commodity will be
    attained when he is consuming only one commodity and when
    the marginal utility is equal to the price paid for that particular
    commodity.

    ★ MUx = Px i.e. Marginal Utility = Price of a commodity “x”

    MU in terms of money = MU in utils / MU of one rupee

    ● When MUx > Px, as the consumer purchases more of the


    commodity x, MU falls due to the operation of law of DMU.

    ● When MUx = Px, utility is maximised and equilibrium is


    attained.

    ● Similarly, when MUx < Px, consumer will have to reduce his
    consumption of commodity x to increase his satisfaction .
    01.
    SECTION
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    you need it
    THANKS

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