CONSUMER EQUILIBRIUM The utility approach – Cardinal approach STUDY UNIT 7

2 STUDY OBJECTIVES Define utility and marginal utility Explain the relationship between total, marginal and average utility Define the law of diminishing marginal utility Determine consumer equilibrium

3 UTILITY AND MARGINAL UTILITY Utility or cardinal approach assumes: Consumers can assign a satisfaction values to the consumption of goods Can compare the utility of different consumer goods Define utility Define marginal utility Calculation of TU, MU, AU

4 TU, MU, AU

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7 Steps to calculate consumer equilibrium Calculate the marginal utility of both products. Divide the marginal utility values by the price to determine the weighted marginal utility (MU/P). Identify the quantities where weighted marginal utilities (MU/P) for both products are the same. Look at the income constraint.

8 CONSUMER EQUILIBRIUM

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10 CONSUMER EQUILIBRIUM Price of pumpkins = R2,00 Price of chicken = R4,00 Income =R16,00

11 CONSUMER EQUILIBRIUM Price of peaches = R1,00 Price of bananas = R2,00 Income =R13,00

12 Steps to calculate consumer equilibrium Calculate the marginal utility of both products. Divide the marginal utility values by the price to determine the weighted marginal utility (MU/P). Identify the quantities where weighted marginal utilities (MU/P) for both products are the same. Look at the income constraint.

13 CONSUMER EQUILIBRIUM

14 CONSUMER EQUILIBRIUM

15 CONSUMER EQUILIBRIUM Price of peaches = R1,00 Price of Bananas = R2,00 Income =R13,00

16 Steps to calculate consumer equilibrium Calculate the marginal utility of both products. Divide the marginal utility values by the price to determine the weighted marginal utility (MU/P). Identify the quantities where weighted marginal utilities (MU/P) for both products are the same. Look at the income constraint.

17 CONSUMER EQUILIBRIUM Price of peaches = R1,00 Price of bananas = R2,00 Income =R13,00