A consumer is any individual who tries to maximise their satisfaction within the constraints imposed by the budget. A consumer may have unlimited wants. But all the wants cannot be completely satisfied. The consumer will decide how much quantity that they have to purchase based on the marginal utility derived from the good and the price of the good.
A consumer will be in equilibrium when the total utility is maximised by spending the limited income on different goods. The utility is the want-satisfying capacity of any commodity. The consumer will maximise the utility when the equal utility is derived from the last unit of money spent on each commodity. This will make the consumer achieve the equilibrium.
The purchasing behaviour of the consumer is determined by two basic factors. They are:
• The marginal utility of the goods
• Price of the goods
The consumer will maximise the utility and make the purchasing decision by considering the proportion of the marginal utility and prices of different goods. Thus the consumer will make the decision based on the marginal utility of the good with its price, i.e., MUx/Px ratio. Marginal utility is the addition made to the total utility when an additional unit of a good is consumed.
The consumer will purchase more of the commodity when the marginal utility derived from it is higher than the price. When MUx is higher than Px (MUx>Px), the consumer will increase the consumption. Conversely, when MUx is lesser than Px (MUx<Px), the consumption of the good will decrease as the marginal utility gained by the consumer is lower than the price paid for the good. Thus the quantity demanded of the good will be governed by the changes in the marginal utilities.
Indifference curve (IC) analysis is the main component of ordinal utility analysis which is based on the ability of the consumer merely to rank their utilities. IC shows the locus of the combination of two goods that gives the same level of satisfaction to the consumer. The consumer is indifferent between any points throughout the IC. Hence it is also called iso-utility curve.
The following are the main properties of IC:
• IC is convex to the point of origin: As we move down the slope of the IC, it will be convex to the point of origin. This is because of the operation of the diminishing marginal rate of substitution (MRS). MRSxy is the rate at which the consumer is willing to sacrifice one good Y for an extra unit of another good X. As MRS between X and Y diminishes along the IC, it becomes convex, i.e., less and less of Y is sacrificed for an additional unit of X.
• IC is negatively sloped: As we move along IC, it will be negatively sloped. It is because when the quantity of one good in the combination is increased, the quantity of the other good has to be reduced. An increase in the consumption of X would always imply a decrease in the consumption of Y. Thus, IC slopes negatively from left to right.
• A higher IC depicts a higher level of satisfaction: A consumer always prefers more commodities compared to lesser commodities. A higher IC would imply a higher basket of good available for consumption by the consumers. Thus a consumer will always prefer the highest attainable IC which gives them more satisfaction. Thus the higher the IC in the IC map, more will be the level of consumer satisfaction. IC3 will give the consumer more satisfaction than IC1 as IC1 is a lower IC compared to IC3.
• IC does not intersect with each other- Two ICs will not intersect with each other. This is against the logic of consumer preferences. When two ICs intersect, the intersection point will be the same for both the ICs. Since a higher IC represents a higher level of satisfaction, the intersection of ICs will result in a point where the level of satisfaction is the same for both the ICs. This is logically not possible. Also, between two given points, there exists innumerable ICs that does not intersect with one another.
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