Econometrics And Econometricians December 01, 2021

Revenue curves under Different markets

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Broadly markets are of three types as follows: 1. Perfectly competitive market 2.Monopoly market 3.Monopolistic competitive market 1.Revenue curve under perfectly competitive market or Perfect competition: Under perfect competition, a firm is a price taker. It cannot influence /change the market price. AR and MR curve 2. Revenue Curve Under Monopoly: A monopolist is a price maker. He is the single seller of the product in the market. Under monopoly, however, if a firm desires to sell more , he has to reduce price of the product. Thus, there is  negative relationship  between price of the product na ddemand for the product in a monopoly market. Accordingly, a Firm’s AR curve (or the demand curve or the priice line) slopes downaward.  3. Revenue Curve Under Monopolistic Competition: In a Monopolistic Competitive market, producers sell “differentiated product” which means products whose close substitutes are easily available in the market. Under Monopolistic Compet...
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Consumer’s Equilibrium-Utility Analysis

 A consumer is in equilibrium when, given his income and market prices, he plans to spend his income on the purchases of intended goods and services in such a manner that he maximizes his total satisfaction. So, how much of a commodity or what combination of commodities a consumer should buy so that he maximizes his satisfaction and attains the point of equilibrium. This can be discussed with reference to two different situations as the following:

(i) When the consumer consumes only one commodity     

(ii) When the consumer consumes two or more commodities


Consumer’s Equilibrium: One commodity case

Purchase of a commodity by a consumer depends on three factors:

(i) Price of the commodity

(ii) Marginal (and total) utility of the commodity: This refers to additional satisfaction obtained from consuming one more unit of the commodity. The consumer will buy that unit of commodity if the marginal utility is greater than the price of the commodity. 

(iii) Marginal Utility of money (MUM): Refers to “worth of a rupee” to a consumer. A consumer defines it in terms of utility that he derives from what he can purchase with a rupee.  It is a measuring rod for a rupee worth of satisfaction.

Consumer’s Equilibrium in case of single commodity is attained when marginal utility gained from a commodity in terms of money is equal to its price.

Consumer’s Equilibrium Condition: (One Commodity Case):

(i)  MUX/PX = MUM (This equilibrium equation tells us that the equilibrium is struck when rupee worth of satisfaction that the consumer expects to get (MUM) is equal to rupee worth of satisfaction that he actually gets (MUX/PX). 

OR

(ii) MUX/MUM = PX (this equilibrium equation tells us that marginal utility expressed in terms of money (MUX/MUM) should be equal to the price of the commodity. In other words, the price that consumer is willing to pay for a unit of commodity exactly matches with that he actually pays. 

 

 Assumptions:

(i) Utility can be cardinally measured 1,2,3, etc. which is measured in exact units called utils.

(ii) Utility is measurable in monetary terms.

(iii) Price of the commodity is given.

(iv) Marginal utility of money remains constant

Consumer’s Equilibrium in case of a single commodity can be explained with the help of schedule and diagram.

Suppose a consumer wants to buy oranges. Further suppose the price of the orange is Rs. 4 per orange. Let the utility be expressed in utils which is measured in terms of rupee i.e. 1 Util= Rs. 1. Hence the MUM= 1.


Consumer’s Equilibrium: Two or more commodity case

Consider a situation when a consumer is buying commodity X and Y with his given income. How will she strike her equilibrium?

In case of any one commodity, say commodity X, a consumer will strike equilibrium when:

 MUX/PX= MUM – (i)

Likewise, for commodity-Y, consumer will strike equilibrium when, 

MUY/PY= MUM – (ii)

Relating equations (i) and (ii) and considering a situation when a consumer buys both commodities X and Y, we can state his equilibrium as in the following equation:

Consumer’s Equilibrium condition (two/more commodity case)

                           MUX/PX = MUY/PY= MUM

(This equilibrium equation tells us that the consumer will get maximum satisfaction consuming that bundle of commodity where marginal utility per rupee spent on good X and marginal utility per rupee spent on good Y by the consumer should be equal to the marginal utility per rupee expected by the consumer.)

 

Gossen’s Second law of Utility: Law of equi-marginal utility states that the consumer strikes her equilibrium when the last rupee spent gives her equal marginal utility whether spent on good X or Good Y. 

 


Summing up the two-commodity case, we can state that the consumer strikes her equilibrium when she is in a state of equi-marginal utility. This occurs when the last rupee spent by her yields equal marginal utility whether spent on good X or Good Y. This is known as law of equi-marginal utility.

Limitations of Cardinal Utility Analysis

1.     Utility or satisfaction is an abstract/intangible matter and cannot be expressed precisely in cardinal (number) terms.

 

2.     Marginal utility of money is not constant in real life. 

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