Consumer’s Equilibrium and Demand
Utility
Utility is the want-satisfying capacity of a commodity. Total utility is total satisfaction, while marginal utility is the additional satisfaction from one more unit.
Law of Diminishing Marginal Utility
With successive consumption of a commodity, marginal utility tends to decline under the relevant assumptions. This helps explain why willingness to pay can fall as consumption increases.
Consumer Equilibrium
A consumer chooses a combination of goods that gives the highest attainable satisfaction subject to income and prices. In the marginal-utility approach, equilibrium is reached when the relevant marginal utility per unit of expenditure is equalised across goods, subject to the assumptions of the model.
Demand
Demand means willingness and ability to buy a quantity at a given price during a specified period. Desire alone is not demand.
Movement vs Shift
A change in the good’s own price causes movement along the demand curve. Changes in income, tastes, expectations or prices of related goods can shift demand.
MCQs
- Why is demand more than mere desire?
Answer: Demand requires both willingness and ability to purchase at a specified price and time. - What happens to demand for a normal good when income rises, other things unchanged?
Answer: Demand generally increases.
Explanation: Higher income raises purchasing power. For a normal good, this increases the quantity consumers are willing and able to buy at each given price, shifting the demand curve rightward.
Graph Practice
Draw a downward-sloping demand curve. Mark a movement caused by a price fall and separately show a rightward shift caused by an increase in income for a normal good.