Question
Explain the conditions of consumer’s equilibrium in case of (1) single commodity (2) two commodities. Use utility approach.
The condition is MU = P.
So long as MU is greater then P, the consumer goes on buying because benefit is greater than cost. As he buys more MU falls because of the operation of the law of diminishing marginal utility. When MU = P, consumer gets the maximum benefits and is in equilibrium.
The conditions:
The ratio MU/P is the rupee M.U. Suppose
$\frac{\text{M.U}_1}{\text{P}_1} > \frac{\text{M.U}_2}{\text{P}_2}$The consumer gets more per rupee MU from commodity 1 as compared to commodity 2. As a result, the consumer will divert expenditure from commodity 2 to commodity 1. This will lead to fall in MU1 and rise in MU2.
This will continue til
l $\frac{\text{MU}_1}{\text{P}_1}$ becomes equal to $\frac{\text{MU}_2}{\text{P}_2}$Operation of the law of diminishing marginal utility is responsible for bringing the equality.
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| | | (Rs. Arab) |
| (i) | National debt interest | 60 |
| (ii) | Wages and salaries | 600 |
| (iii) | Net current transfers to abroad | 20 |
| (iv) | Rent | 200 |
| (v) | Transfer payments by government | 70 |
| (vi) | Interest | 300 |
| (vii) | Net domestic product at factor cost accruing to government | 400 |
| (viii) | Social security contributions by employers | 100 |
| (ix) | Net factor income paid to abroad | 50 |
| (x) | Profits | 300 |
| S.No. | Particulars | Amount (In ₹ crores) |
| (i) | National Income | 50,000 |
| (ii) | Net Indirect Taxes | 1,000 |
| (iii) | Private Final Consumption Expenditure | ? |
| (iv) | Gross Domestic Capital Formation | 17,000 |
| (v) | Profits | 1,000 |
| (vi) | Government Final Consumption Expenditure | 12,500 |
| (vii) | Wages & Salaries | 20,000 |
| (viii) | Consumption of Fixed Capital | 700 |
| (ix) | Mixed Income of Self Employed | 13,000 |
| (x) | Operating Surplus | ? |
| (xi) | Net Factor Income from Abroad | 500 |
| (xii) | Net Exports | 2,000 |
| | | (₹ Arab) |
| i. | Net current transfers to abroad | (-) 15 |
| ii. | Private final consumption expenditure | 600 |
| iii. | Subsidies | 20 |
| iv. | Government final consumption expenditure | 100 |
| v. | Indirect tax | 120 |
| vi. | Net imports | 20 |
| vii. | Consumption of fixed capital | 35 |
| viii. | Net change in stocks | (-) 10 |
| ix. | Net factor income to abroad | 5 |
| x. | Net domestic capital formation | 110 |