Concept of TU, MU and AU

Goods are desired because of their ability to satisfy human wants. The property of goods that enables to satisfy human wants is called utils. As individuals consumes more and more of the commodity the total utility increases but the MU declines with the increase in TU.

   Marginal utility(MU) is the extra utility received from the consumption of one additional unit of the good per unit of time while holding constant the quantity consumed of all other commodities.

QX	TU	MU
0	0	0
1	10	10
2	16	6
3	20	4
4	22	2
5	22	0
6	20	-2

In the above table when a person consumes 1 unit of commodity his total utility is 10 and MU is 10. As he goes on increasing the quantity, his TU increases but MU declines. In the 5^th point, it remains unchanged. This point in TU is called saturation point. In the 6^th point the marginal utility goes negative which takes TU to fall.

Assumption

·       Consumptions of single commodity x

·       Diminishing marginal utility

·       Constant marginal utility of money

·       Money income of consumer is given and constant

Based on the assumption, the consumer by consuming a commodity attains equilibrium when ration of marginal utility to price equal constant marginal utility of money that is for a consumer to be in equilibrium the marginal utility should be equal to the price paid for the commodity i.e MUx =Px

    Or MUx/Px=1………(1)

In our equation 1 represents constant which is the marginal utility of money (MUm)

Equation (1) becomes

   MUx/Px=MUm

From the equation (1) MUx=Px we can say that as marginal utility from the commodity say x equals price of it then the consumer will be in equilibrium.

What happens when MUx is not equal to Px?

If MUx > Px = marginal utility from commodity x exceeds price of x

To bring the equality between MUx and Px MUx should be reduced as unit consumption of x rises , Mux falls and this process continues till MUx equals Px and equilibrium is restored. But further reduction of MUx quantity consumption x  rises only when Px falls.

If MUx is less than Px, dis equilibrium arises. To bring the equilibrium between price and utility the MUx should be increased and to increase the MUx there should be less  consumption of commodity. And to consume less units the price of the commodity should be increased and finally there will be equilibrium.

Diagram

In this figure MUxPx curve shows the diminishing marginal utility of commodity x and PxMUm shows the constant marginal utility of money. Consumer attains the equilibrium at X3 unit of commodity. When the commodity is reduced to X2 then MU increases more than price, which arises disequilibrium. To bring equilibrium MU should be decreased with the increase in consumption of commodity X. this process continues till the X2 reaches X3.similarly when the consumption of commodity reaches to X4 then MU is less than price, which arises disequilibrium. To bring equilibrium MU should be increased with the decrease in consumption. Consumption can only be decreased with the increase in price. This process continues till X4 reaches X3 where it attains equilibrium.