TERM PAPER ON

MICRO ECONOMICS
BASED ON THE STUDY OF LAW OF DEMAND

PREPARED FOR: MOHAMMED BELAL UDDIN LECTURER DEPARTMENT OF ACCOUNTING COMILLA UNIVERSITY

PREPARED BY:

OPTIMISTIC
CONSIST OF
ROLL 12 21 22 29 34 45 NAME FARDUS MAHMUD A. K. M. MAHMUDUL HASAN FARZANA SULTANA MD. MOSHIUR RAHMAN PRODYUT KANTI DAS UMME SALMA DESIGNATION GROUP LEADER MEMBER MEMBER MEMBER MEMBER ASST.GROUP LEADER

APRIL 29, 2008

MOHAMMED BELAL UDDIN LECTURER DEPARTMENT OF ACCOUNTING COMILLA UNIVERSITY Dear Sir, Here is the report on the study of law of demand you asked us to conduct last April 15, 2008. By the grace of Almighty ALLAH, the most benevolent and merciful we have been successful to complete this term report. Being prepared this report I and my group member help us to meet up this report. We have tried our best to make the report comprehensive and reliable within the given period. Nevertheless, some mistake might be occurred, please rectify these types of unconscious mistakes with sympathy.

Sincerely yours

Fardus Mahmud On behalf of Optimistic

QUESTION Definition of demand The law of demand Forces behind demand curve Why demand curve slope downward Consumers surplus Meaning of elasticity Elasticity of demand Price elasticity Elastic demand Inelastic demand Unit elasticity of demand Infinite elasticity of demand Zero elasticity of demand Cross elasticity Income elasticity Point elasticity ARC elasticity Indifference curve Properties of indifference curve Marginal rate of substitution Diminishing marginal rate of substitution Budget line Shifting budget line Distinguish between indifference curve & indifference map Income effect Substitution effect Inferior good

PAGE NO 05 05 06 07 08 09 10 11 11 12 13 13 14 14 15 17 18 18 22 23 25 26 26 27 29 30 31

 Giffen good

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NO 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

FIGURE NAME Demand curve Substitution effect Consumers surplus Elasticity of demand Price elasticity of demand Elastic demand Inelastic demand Unit elasticity Infinite elasticity Zero elasticity Cross elasticity Income elasticity Point elasticity ARC elasticity Indifference curve Marginal rater of substitution Diminishing marginal rate of substitution Budget line Shifting budget line Price effect Income effect Substitution effect Inferior good Giffen good Normal good

PAGE 06 09 10 11 11 12 12 13 14 14 15 16 18 19 25 26 27 27 29 30 31 32 32 33 34

 DEMAND:
The demand for anything at a given price is the amount of it, which will be brought per unit of time at the price. It is a multivariate relationship determined by many factors simultaneously. Some of the mist important determinates of the market demand for a particular product are its own price, consumers testes, income, price of other commodities, income distribution, government policy, past levels of demand, past level of income etc.

THE LAW OF DEMAND:

According to the law of demand, at a given time period when other things remaining the same, quantity for a commodity fall as price rises & vice versa. it can be shown graphically below.

Y p0 Demand curve Price p1 p3 O q0 q1 q2 Quantity

Figure: Demand curve

 FORCES BEHIND DEMAND CURVE:

The graphical representation of the demand schedule is the demand curve. A demand curve shows the relationship between the quantity demanded of a good and its price when all other influences on consumers planned purchases remain the same. Y 15 Price 10 5 O 2 4 6 Quantity demanded The forces behind the demand curve are given below: The average income: The average income of a consumer is the key determinants of demand. As peoples income rise, individuals tend to buy more of almost everything even if prices do not change. The size of market: The size of market is measured by the population. It clearly affects the market demand curve. The price of availability of related goods: The price and availability of related goods influence the demand for a commodity. Demand for good A tends to be low if the price of substitute product A is low. Testes or preferences: Testes represent a variety of cultural and historical influences. They may reflect genuine psychological needs and they may include artificially contrived cravings.
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 Special influences: Finally, special influences will affect the demand for particular goods.the demand for umbrellas is high in rainy Seattle but low in sunny phoenix. These are some of the factors, which bring about changes in demand curve.

Why demand curve slope downward?

According to the law of demand, other things remaining unchanged, when the price increase the quantity demand decreases, when the price decreases the quantity demand increases. That is, When, price Demand & when, price Demand As a result the demand curve slopes downward to the right. These are the following reasons for sloping downward of demand curve. 1. Law of diminishing marginal utility: Law of diminishing marginal utility is the most important reason for sloping downward of demand curve. Marginal utility of money remaining constant. When price decreases, the consumer increases his purchase of goods because the marginal becomes equal to the price after increasing the purchase. Thus the quantity demanded increases after decreasing price.

Price P2 P P1

D Downward sloping Of demand curve

D O Q2 Q Q1 Quantity demanded
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2. Income effect: If the price decreases the consumers real income increases, so the consumer can purchase more than before. In this stage, the quantity demanded increases, after decreasing price. 3. Substitution effect: if the price of substitute goods remaining unchanged, when the price of any good decreases than the consumer consumes that goods more & more instead of substitute goods. So the demand curve slopes downward. Y Y p0 p0 p1 p1 q0 q1 X O q0 q1 X

Quantity demand of beef Quantity demand of chicken 4. Afford to buy: When the price increases, the buying power of consumer decreases than before. so the consumer consumes less than before. Again when the price decreases the buying power of consumer increases. In this stage, after decreasing price, the consumer consumes more than before. Thus when price decreases, quantity demand increases.

Consumer surplus:
The consumer surplus is a concept introduced by Marshall, who maintain that it can be measured in monetary units & is equal to the difference between the amount of money that a consumer actually pays to buy a certain quantity of commodity X and the amount that he would be willing to pay for this quantity rather than do without it.
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Px A p1 p2 p3 p4 q1 q2 q3 q4 B Qx Graphically the consumers surplus may be found by his demand for commodity x and the current market price which he cannot affect by his purchases of this commodity. Assume that the consumers demand for x is a straight line AB and the market price is P. At this price the consumer buys q units of x and pays an amount (a)(p) for it. However he would be willing to pay p1 for q1, p2 for q2, p3 for q3 and so on. The fact that the price he would be willing to pay for the initial units of x implies that his actual expenditure is less than he would be willing to spend to acquire the quantity q. This difference is the consumers surplus, and is the area of the triangle PAC.

MEANING OF ELASTICITY:
A term widely used in economics to denote the responsiveness of one variable to changes in another. Thus the elasticity of X with respect to Y means the percentage change in X for every 1 percent change in Y. Elasticity is defined as the percentage change in dependent variable divided by the percentage change in independent variable.

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ELASTICITY OF DEMAND:
Elasticity of demand is the measure of the responsiveness of demand to changing prices. The elasticity of demand is a measure of the relative change in amount purchased in response to a relative change in price on a given demand curve. Here ed= = % change in price here Q = changes in quantity demanded P = change in price P = original price Q = original quantity Y 10 5 25 here ed= 50-25/10-5 * 5/50 = 25/5 * 5/50 = =0.5 50 X Q . P

P Q %change in quantity demanded

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PRICE ELASTICITY OF DEMAND: When 1% changes in price leads to more than 1% change in quantity, we say that elasticity is greater than one. Then the good has elastic demand.

Y 15 Here, ed >1 10 ed 10 12 q Figure: Price elasticity of demand 1. ELASTIC DEMAND: The change in demand is not always proportionate to the change in price. A small change in price may lead to a great change in demand. In that case the demand is elastic. y p1 p2 ed >1 q1 q2 q

Figure: Elastic demand

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2. INELASTIC DEMAND: If a big change in demand is followed only by a small change in demand. It is said to be a case of inelastic demand. y p1 p2 ed < 1 O q1 q2 q

Figure: Inelastic demand 3. UNIT ELASTICITY OF DEMAND: When 1% changes in price leads to 1% change in Quantity, we say that elasticity is unit elasticity. y p1 p2 ed = 1 q1 q2 q

Figure: Unit elastic demand

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4. INFINITE ELASTICITY OF DEMAND: When very small change in price leads to very large change in quantity, we say that is infinite elasticity.

ed =

Figure: Infinite elasticity of demand 5. ZERO ELASTICITY OF DEMAND: When very large change in price leads to very insignificant change in quantity, we say that elasticity is zero.

P ed = 0

Figure: Zero elasticity of demand

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 CROSS ELASTICITY: Cross elasticity of demand is defined as the percentage change in quantity demanded of one commodity due to a percentage in price of other related commodity. Cross elasticity of demand for X & Y Proportionate change in purchase of commodity X = Proportionate change in purchase of commodity Y Eab= Qa/Pb * Pb/Qa This type of elasticity arises in the case of interrelated goods such as substitutes and complementary goods. Pb substitute 10 5 Eab= 10/5 * 5/10 =1 10 Pb 20 Qa

Sugar

12 10

Eab= -5/2 * 10/20 = -1.25 Complements is Negative 15 Tea 20 Qa

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 INCOME ELASTICITY: Income elasticity is a measure of potential buyers to change in income. Income elasticity of demand is defined as the percentage in quantity demanded of a commodity divided by the percentage change in income of the consumer. It is equal to unit or one when the proportion of income spent on good remains the same even though income has increased. It is said to be greater than unit when the proportion of income spent on a good increases as income increases. It is said to be less than unity when the proportion of income spent on a good decreases as income increases. y=Q/y * y/Q

110 100

160 100

10 Normal goods

12

10

inferior goods ey = -3/60 * 100/10 =0.5 ey < 0

Here, ey= 2/10 * 100/10 =2 + ey > 0

It is zero income elasticity of demand when change in income makes no change in our purchase and it is negative when with an increase in income the consumer purchase less, in the case of inferior goods.

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DETERMINANTS OF PRICE ELASTICITY:

We know that the elasticity is relative. For one person or at one place, the demand may be elastic, and for another person and at another place it may be inelastic. Some determinants of price elasticity are given below. Availability of substitute: The demand for a commodity is more elastic if there are close substitution for it. When the price of tea rises we may curtail its purchase and take to coffee, and vice versa. In a case like this a change in price will lead to expansion or contraction in demand. Nature of goods: Luxury goods are price elastic while essential goods are price inelastic. It stands to reason that lower in of the price of things like radio and TV sets. Refrigerators and artistic furniture will lead to more being bought, which is the demand is elastic. On the other hand the change in price of wheat may be immaterial for upper classes, but its consumption will certainly increase among the poor when price falls. Time period: The elasticity of demand is greater in the long run than in the short run for the simple reason that the consumer has more time tom make adjustment in his scheme of consumption. Range of use: The wider the range of use the more elastic the demand for the product is likely to be. When wheat becomes very cheap, it can be used even as cattle feed. Hence, demand for a commodity having several uses in elastic. Level of income: The demand on the part of the poor people is sensitive to price changes. In order to derive maximum benefit from their marginal income, they must be alert to vary their purchase in response to changes in prices. But rich people continue to bye practically the same quantities even though the price may have changed. Level of prices:

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Elasticity of demand is great for high prices, & great or at least considerable for medium prices, but it declines as the price falls, the gradually fades away if the fall goes so far that stativity level is reached. Postponement of use: The demand of the goods the use of which can be postponed in more elastic than the elasticity of those goods, the use of which can not be postponed in inelastic. Proportion of total expenditure: if a consumer absorbs goods only a small proportion of total expenditure such as salt, the demand will not be much affected by a change in price. Hence it will be in elastic. Joint demand: The demand for jointly determined goods is less elastic. For example, the carriage becomes cheap but the prices of horses continue to rule high, demand for carriages will not extend much. Market imperfections: Owing to ignorance about market tends the demand for good may not increase when its price falls for the simple reason that consumer that consumers may not be aware of the fall in price. Technological factors: Low price elasticity may be due to some technical reasons. For example lowering of elasticity rates may not increase consumption because the consumers are unable to bye the necessary electric appliance.

POINT ELASTICITY OF DEMAND:

At first Joseph E. Stiglitz introduced the point elasticity method for measuring elasticity of demand by geometric process. When the elasticity is measured at a certain point then the elasticity is called point elasticity. To be more exact, The point elasticity of demand is defined s the proportionate change in the quantity demanded resulting from a very small proportionate change in price. By using this tactic we can measure elasticity of a specific point. ep = Q/ P * P/Q Lower segment of the demand curve ep =
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Upper segment of the demand curve

ARC ELASTICITY OF DEMAND:

The ARC elasticity is a measure of the average elasticity that is the elasticity at the mid points of the chord that connects two points on the demand curve defined by the initial and the new price level. We use ARC elasticity of demand when price changes are significant or appreciable as distinguished from point elasticity. ARC elasticity (p1+p2)/2 ep = Q/ P * (Q1+Q2)/2 15 = Q/ P * p1+p2/ Q1+Q2 = 2/5 * 10+15/18+20 = 0.26 18 20 Q 10 R D P D A

INDIFFERENCE CURVE:
An indifference curve in the locus of point particular combination of bundle of goods which yield the same utility to the consumer so that he is indifference as to the particular combination he consumes. An indifference curve represents satisfaction of a consumer from two commodities. it is drawn on the assumption that for all possible points on an indifference curve the total satisfaction remains the same.

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Slope of indifference curve = -y/x = MRS xy Y

y1 y2 y3 y4

A B C D x1 x2 x3 x4 IC X

Assumption: Rationality: The consumer is assumed to be rational. He aims at the maximum of his utility, given his income and market prices. Ordinality: The consumer can tank his preferences according to the satisfaction of each basket. He need not know precisely the amount of satisfaction. He expresses his preference for the various bundles of commodities. Diminishing marginal rate of substitution: Preference ranked in terms of indifference curves, which are assumed to be convex to the origin. This implies that slope of indifference curve is called the marginal rate of substitution of the commodities.

Convex

Concave

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 Total utility of consumer: The total utilities of the consumer depend on the quantities of the commodities consumed. U = (q1, q2, q3, ............qx, qy,...........qn) Consistency of choice: The choice of consumer will be consistent. If A>B, then B>A Transitivity of choice: The consumers choice is characterized by transitivity. If A>B, and B>C, then A>C

Indifference schedule: Combinations Apples Mangoes 1 15 1 2 11 2 3 8 3 4 6 4 5 5 5 In the above schedule, the consumer obtains as much total satisfaction (total utility) from 11 apples & 2 mangoes as from 8 apples & 3 mangoes and as well as from other combination. In other words, our consumer feels indifference whether he gets the 1st combination (15A + 1M) 2nd combination (11A + 2M) 3rd combination (8A + 3M)
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4th combination (6A + 4M) 5th combination (5A + 5M) The total satisfaction is the same in all these combination. Y A 15 Apples 11 C 8 6 5 IC O 1 2 3 4 5 X D E B

Mangoes Mangoes are measured along the X-axis, their number increases from left to right. Apples are measured along Y-axis & their number increase upwards. if the consumer were at point on A the curve IC with 15 apples & 1 mango, he would be just as satisfied as at point B with 11 apples& 3 mangoes or at point C with 8 apples& 3 mangoes or at point d with 6 apples & 4 mangoes and so on. These combinations give him same level of satisfaction. if we join the points A, B, C, D, & E, we get a continuous curve IC, each points on it showing same level of or equal satisfaction or the indifference of the consumer towards the various combinations.

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PROPERTIES OF INDIFFERENCE CURVE:

The diagram of an indifference curve given already is a typical one. it is clear why indifference curves normally have the shape. Besides we shall notice the properties of typical indifference curves. There are three characteristics of indifference curves, Downward sloping to the right Non- intersecting Convex to origin Higher indifference curve, higher the level of satisfaction & vice versa.

Downward sloping to the right: To begin with indifference curves curve Slope downwards from left to right. It is because when the consumer decides to have more units of one of the two goods, he will have to reduce the number of units of other good. If he is to remain on the same level of satisfaction.

IC1

Non- intersecting: Y No two such curves will ever cut each other if they did, the point of their intersection would imply two different level of satisfaction .B A . C

i
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ii O X Convex to origin: Third property of indifference curves is that they are normally convex to the origin. The implication of this convexity rule is that as we have more & more & more of good X & less & less of Y. the marginal rate of substation of X for Y goes on falling. IC O Higher indifference curve, higher the level of satisfaction & vice versa. Y X Y

IC3 IC2 IC1 O X

MARGINAL RATE OF SUBSTITUTION:

The marginal rate of substitution shows how much of one commodity is substituted for how much of another or at what rate a consumer is willing to substitute one commodity for another in his consumption pattern. In Hichks word we may define marginal rate of substitution of X for Y as the quantity of Y which would just compensate the consumer for the loss of the marginal unit of X.
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combination 1 2 3 4 5

apple 15 11 8 6 5

mangoes 1 2 3 4 5

MRS xy ---4:1 3:1 2:1 1:1

Let us suppose that the consumer decides upon the forth combination. Where terms of our diagram means that he chooses the combination represented by a point on IC. Now the marginal unit of mangoes is the third mangoes, to acquire which he has had to forego two apples. It is common observation that, as we come to have more & more of one good, we shall be prepare to forego less & less of the other since our desire for the former becomes less & less intense with more & more of it. In technical language, it will be said that the marginal rate of substitution of X for Y will fall as we have more of X & less of Y. The principle is that as X is substituted for Y so as to keep the consumer at the same level of satisfaction, the marginal rate of substitution X for Y diminishes. So we can say that The marginal rate of substitution shows how much one commodity is substituted for how much of another. The marginal rate of substitution of X for Y is defined as the number of units of commodity Y that must be given up in exchange for an extra unit of commodity X so that the consumer maintains the same level of satisfaction.

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DIMINISHING MARGINAL RATE OF SUBSTITUTION:

Y A B C D E O Indifference Curve X

Good Y

Good X When the consumer slides down the curve A to B, he forgoes Y of good Y to obtain X of good X. here the slope of indifference curve=MRSxy=Y/X. as the consumer slides down, Y becomes shorter & shorter while X remains the same. when a consumer moves from A to B, B to C, C to D and so on, he is prepared to forego less and less of Y for a unit of X. the reason for diminishing marginal rate of substitution are: Since a particular want is satiable. The edge of want for a good is blunted as the consumer has more and more of it. The goods are imperfect substitutes for one another. Thats why as one commodity and decrease in that of the other would make no difference.

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 The marginal rate of substitution of one good for another will not diminish if the want satisfying power of the other good has increased at the same time.

BUDGET LINE:
A line indicating the combination of commodities that a consumer can buy with a given income at a given set of prices. Y 20 15 . Budget line 10 . 5 O . y/px . 5 . . 10 15 . 20 . 25 X y/py

SHFTING BUDGET LINE:

1. Y Py 2. Y Py

X
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Px Px1 Px Py remain constant 3. Y Py1 Py 4.

Px1 Px Px Py remains constant

Y Py Py1

O Px Px remains constant Py 5. Py1 Py

O Px Px remains constant Py 6. Py Py1

Px Px & Py constant Y INDIFFERENCE MAP:

Px1

Px1

Px

Px & Py constant Y

DISTINGUISHES BETWEEN INDEFFERENCE CURVE &

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An indifference curve is the locus of points representing all combination of two market baskets that provides the same level of satisfaction. An indifference map is a set of indifference curves that describes the consumers preferences among various combination of market basket. Indifference curve No Indifference map An indifference curve is the locus 01 An indifference map is a of points representing all set of indifference curves combination of two market that describes the baskets that provides the same consumers preferences level of satisfaction. among various combination of market basket. 02 .A . A .B . B .C i Indifference curve As we attain any upper point of 03 indifference curve the total utility does not change. It can be drawn without the help of 04 indifference map. Indifference map As we attain any points which is on the upper indifference curve the total utility of consumer increased. The indifference map can not be drawn without the help of indifference curve as indifference map is nothing but a combination of indifference curves. income consumption curve ii . C iii

05 Budget line

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. Optimal choice

INCOME EFFECT:
Income effect is the effect on the quantity demanded exclusively as a result of change in money income, all prices remaining constant. What will happen to the consumers equilibrium and the amount of the two commodities bought in his income were to change while prices of the commodities remain the same. Obviously, as a result of change in income, his satisfaction will either increase or decrease, for he has spent now a large or small income to spend. The result of this type if change is described in technical language as income effect. Y L4 Amount of Commodity Y L3 ICC L2 p4 L1 p2 p1 c3 c2 O c1 M1 M2 M3 M4 Amount of commodity X X c4 p3

With price income line L1M1, the consumer is in equilibrium point P1. Now suppose the income of the consumer increase so that his new price income line is L2M2. As a result of this increase in income, the consumer will move to a new equilibrium position at the point P2 on a higher indifference curve C2 and will be buying OH2 of commodity X and OQ2 of commodity Y. thus
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the consumer will get on to a higher level of satisfaction as a result of an increase in income. If his income increase still further, so that the new price income line becomes L3M3 he will be in equilibrium at the point P3 on as indifference curve C3 and so on for further increase in income. If the points P1, P2, P3, and P4 etc are joined together by a line passing from the origin, we get, what is called income consumption curve. The income consumption curve shows how the consumption of two commodities is affected by change in income when prices of both goods are given and constant. Total Effect: Total effect is nothing but summation of substitution effect and income effect. Total effect or= Substitution effect+ Income effect

SUBSTITUTION EFFCT:
The substitution effect is the increasing in the quantity bought as the price of the commodity falls after adjusting income so as to keep the same as before. This adjustment in income is called compensating variation and is shown graphically by a parallel shift of the new budget line until it becomes tangent to the initial indifference curve. The propose of the compensating variation is to allow the customer to remain on the same level of satisfaction as before the price change.

P Commodity Y A Q T R in case of Normal goods

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O M K L R B H Commodity X The substitution effect can be easily explained with the help of the graph. In this figure, the consumer is in equilibrium at point Q where the given price is PL is tangent to indifference curve C1. When the price of X falls and the price of Y remain the same, the price line will shift to PH (because now more of X is purchased) and the consumer will be in equilibrium at R. where the new price line PH touches the indifference curve C2. To find the substitution effect, we draw a hypothetical price line AB parallel to the price line PH so that it should touch the indifference curve C1. Slope of AB or PH shows the changed relative prices of X & Y. in terms of this diagram, BH or AP is the amount of money income that should be taken away from the consumer so that the gain in real income which results from the fall in the price of X is cancelled out. with the price line AB the consumer is in equilibrium at point T, he gets the same level of satisfaction as at Q, because both Q & T are situated on the same indifference curve C1 is due to only the relative fall in the price of X, at the point T, the consumer buy MK of X than at Q as X is not relatively cheaper. This MK is the substitution effect which involves movement from Q to T. Inferior goods: Y Substitution effect negative Income effect positive P

b a ii c i
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O x1 x2 x3 P P1

Movement from a to b is due to total effect = x1x2 (price effect) Movement from a to c is due to substitution effect = x1x3 Movement from c to b is due to income effect = - x3x2 Total effect = substitution effect + income effect x1x2 = x1x3 + (-x2x3) = x1x3 x2x3 = x1x2 Giffen goods: Giffen goods are special type of inferior goods. Quantity demanded of giffen goods as price rise and vice versa. Y Substitution effect = negative Income effect = positive b ii a c i O x2 x1 x3 p p1 Movement from a to b is due to total effect = - x1x2 Movement from a to c is due to substitution effect = x1x3 Movement from c to a is due to income effect = - x2x3 Total effect = Substitution effect + Income effect
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-x1x2 = x1x3 + (-x2x3) = x1x3 x2x3 = - x1x2

Normal Good:
If the consumer increases of his purchases of goods due to the increase in income, then the effect is called positive income effect. The good whose income effect is positive is called normal good. So in case positive income effect, income consumption curve is upward sloping. Y P

a c

b i ii P1 X

x1 x2 x3 P

In the figure, there are three indifference curves. IC1,IC2 and IC3 in difference map and PL, P1L1, P2L2 are the price lines. Icc is the income consumption curve in case of normal goods. Point E is the initial equilibrium point. when the income increases, the consumer income increases his purchase of good at new equilibrium point E1. Again when the income decreases, the price line shifted P2L2 and the consumer purchase less than before at new equilibrium point E2. By adding points E1, E, E2, income consumption curve is found. It is upward sloping because it is normal goods.

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Substitution Effect: The income of consumer remaining constant, when the quantity demanded of two goods is changed proportionately after change in price, and then it is generally known as substitution effect. Professor Hichs analyses this substitution effect through indifference curve.

In the figure good x and good y are measured along the ox axis and oy axis respectively. The consumer at first reaches in equilibrium at point A. At point A, the consumption of good x and good y is on. Now the budget line is shifted to PL, from PL when the price of good X decreases. As a result the consumers real income is increased. To remain the real income unchanged, price line p2l2 is tangent to the same indifference curve. IC at point B. at the point B the consumption at good X is OM1 and good Y is ON1. In this case, the consumer consumes excess MM1, amount of good X instead of
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consuming NM1, amount of good Y. this change is known as substitution effect.

CONSUMERS EQUILIBRIUM
When the consumer attains a position of maximum satisfaction & would have no further incentive to make any change in the quantity of the commodity purchased. Equilibrium with one commodity purchased: The law of diminishing marginal utility tells us the position of consumers equilibrium in the case of one commodity purchase. If price fall consumer buy more until successive units & the marginal utility will come down to the level of price. That means equality between marginal utility & price indicates the position of consumers equilibrium when only commodity is being purchase and consumed. Equilibrium with two commodity purchased: In this case the position of the equilibrium will be determined according to the law of equi-marginal utilities. A consumer derives maximum satisfaction when the marginal utilities of two commodities are equal. In case they are not equal. Adjustment will be made in the matter of quantities purchased. That is buying more of the commodities with higher marginal utilities and buying less the lower marginal utility commodity. He purchased till the marginal utilities of two commodities are equalized. This is a position of maximum satisfaction. The position of maximum satisfaction, the consumer considers two factors. The marginal utilities of two goods and their price Given his money income that he has to spend on the two commodities. From above, we can derive a formula for a consumers equilibrium in respect of two goods X & Y. MUx = MUy Px Py that is marginal utility of good X divided by the price of X, must be equal to marginal utility of Y divided by the price of Y. it means that it is giving the consumer maximum satisfaction.
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We can show the consumers equilibrium with the help of table & diagram. Units MUx MUx/Px MUy MUy/Py 1 33 11 36 9 2 30 10 32 8 3 27 9 28 7 4 24 8 24 6 5 21 7 20 5 6 18 6 16 4 Here Px = 3 Py = 4 Explanation of the table: With the given income, suppose a consumers marginal utility of money is constant at Re. 1 = 8 utilities. From the above table, it will be seen that MUx/Px = 8 units when the hypothical consumer buys four units of X goods and MUy/Py = 8 when he byes two units of Y goods. This consumer will thus be inequilibrium when he is buying four units of X goods and two units of Y goods and he will be spending 20 taka on these two goods. Diagramic representation: Y

Price MUy MUx Py Px E E

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D O B F F G G X Figure: Consumers equilibrium by using principle of equi-marginal utility.

ACKNOWLEDGEMENTS
Nothing can be created successfully by itself of individually. One needs help of others too. I am very thankful to my group members who worked with me with concentration and good understanding.

We want to give special thanks to our honorable Course teacher for his Constant and individual advice. We appreciate the helpful suggestions of the following reviewers.
Mohammed Belal Uddin Lecturer Department of Accounting

Fardus Mahmud Student of Accounting Dept. Group leader of Optimistic Umme Salma
Student of Accounting Dept.

Md. Moshiur Rahman

Student of Accounting Dept. Proudhut Kanti Das Student of Accounting Dept.

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Farzana Sultana Student of Accounting Dept.

A. K. M. Mahmudul Hasan

Student of Accounting Dept

For making this term paper information has collected from these following sources.

Lecture of course teacher. Modern Micro Economics (2nd edition )

Koutsoyaunic

Modern Economic Theory Economics

K. K. Dewett.

Paul Samuelson & William D. Nordhaus

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