Consumer equilibrium under the cardinalist approach:
The cardinalist approach of consumer theory assumes measurable utility in monetary terms such that
the consumer is in equilibrium when marginal utility derived from the consumption of a commodity
is equal to the unit price of the commodity, that is, MUX = Px.
Where there are more than one commodities, the condition for the equilibrium of the consumer is
the equality of the ratios of the marginal utilities of the respective commodities to their prices i.e.
Assuming one commodity (X), a fall in price distorts the equilibrium of the consumer which
becomes Mux>Px; to go back to equilibrium the consumer should reduce the marginal utility of X
by consuming more of X pursuant to the oxiom of diminishing marginal utility.
Px & Py : Prices of commodities X and Y respectively.
If for instance, the price of X falls, Mux/Px>Muy/Py and to go back to equilibrium, Muy should be
increased by consuming less of commodity Y or increasing the consumption of X in order to reduce
Mux again pursuant to the law of diminishing marginal utility.
Therefore, as the price of a commodity (x) increases, the consumer?s marginal utility falls such
that the consumer is now willing and able to purchase relatively less units of X (in order to increase
utility) thereby reducing the quantity demanded of commodity X.
If however, the price of X falls, Mux increases and therefore the consumer would be willing and able
to buy more of X hence increasing the quantity demanded of X. Thus a normal demand curve is
based on the law of diminishing marginal utility.
Wilfykil answered the question on
February 6, 2019 at 06:39