Merchant of Venice
ONSUMER EQUILIBRIUM CARDINAL AND ORDINAL
UNIT 5 CONSUMER EQUILIBRIUM:
CARDINAL AND ORDINAL
APPROACHES
Structure
5.0 Objectives
5.1 Introduction
5.2 Cardinal utility approach to consumer behaviour
5.3 The law of eventual diminishing marginal utility
5.4 Consumer’s equilibrium
5.5 Basis of law of demand in the cardinal approach
5.6 Consumer’s surplus
5.7 The ordinal utility approach to consumer behaviour: the indifference curve approach 5.8 Consumer’s budget constraint
5.9 Consumer’s equilibrium in the ordinal utility approach
5.10 Special cases
5.11 Price-consumption curve
5.12 Income-consumption curve
5.13 Price, substitution, and income effects
5.14 Derivation of the demand curve for a good
5.15 Inferior goods and Giffen goods
5.16 Let us sum up
5.17 Some key words
5.18 Some useful books
5.19 Answers or Hints to Check Your Progress Exercises
5.0 OBJECTIVES
This unit will enable you to: l understand and analyse how a consumer attains equilibrium; l use cardinal utility theory to explain consumer behaviour; l describe the law of diminishing marginal utility; l explain consumer’s equilibrium in terms of the Marshallian law of equi-marginal utility. Also use this law to explain the law of demand; l explain the concept of consumer’s surplus; l explain consumer’s behaviour in terms of ordinal utility theory, the Hicks-Allen approach l describe consumer’s equilibrium condition in terms of ordinal utility theory; l decompose price effect into substitution effect and income effect; l graphically derive price consumption curve and income consumption curve, and demand curve for a good; l understand the difference between normal, inferior, and Giffen goods; l provide a comparative evaluation of the two competing theories.
5.1 INTRODUCTION
In the previous unit we have introduced the concept of demand function, various determinants of demand and its elasticity. In this unit, we continue the discussion on demand and focus our
UNIT 5 CONSUMER EQUILIBRIUM:
CARDINAL AND ORDINAL
APPROACHES
Structure
5.0 Objectives
5.1 Introduction
5.2 Cardinal utility approach to consumer behaviour
5.3 The law of eventual diminishing marginal utility
5.4 Consumer’s equilibrium
5.5 Basis of law of demand in the cardinal approach
5.6 Consumer’s surplus
5.7 The ordinal utility approach to consumer behaviour: the indifference curve approach 5.8 Consumer’s budget constraint
5.9 Consumer’s equilibrium in the ordinal utility approach
5.10 Special cases
5.11 Price-consumption curve
5.12 Income-consumption curve
5.13 Price, substitution, and income effects
5.14 Derivation of the demand curve for a good
5.15 Inferior goods and Giffen goods
5.16 Let us sum up
5.17 Some key words
5.18 Some useful books
5.19 Answers or Hints to Check Your Progress Exercises
5.0 OBJECTIVES
This unit will enable you to: l understand and analyse how a consumer attains equilibrium; l use cardinal utility theory to explain consumer behaviour; l describe the law of diminishing marginal utility; l explain consumer’s equilibrium in terms of the Marshallian law of equi-marginal utility. Also use this law to explain the law of demand; l explain the concept of consumer’s surplus; l explain consumer’s behaviour in terms of ordinal utility theory, the Hicks-Allen approach l describe consumer’s equilibrium condition in terms of ordinal utility theory; l decompose price effect into substitution effect and income effect; l graphically derive price consumption curve and income consumption curve, and demand curve for a good; l understand the difference between normal, inferior, and Giffen goods; l provide a comparative evaluation of the two competing theories.
5.1 INTRODUCTION
In the previous unit we have introduced the concept of demand function, various determinants of demand and its elasticity. In this unit, we continue the discussion on demand and focus our