Microeconomics
The price of the two goods are not consistent with equilibrium prices because consumption of products will not depend on the entire market but an individual to will purchase the product based on marginal utility. In this case the marginal rate of substitution between product X and Y will be influenced by level of utility of each product and the price one is willing to pay can be as results of the need of the product. Equilibrium price will be that which is determined by market forces (Lipsey and Colin, 1992).
Thus one state that marginal rate of substitution is equal to the change in the quantity of one good that just offsets a one-unit change in the consumption of another good such that total satisfaction remains constant and this depends on individuals and not market forces (Mankiw, 2008).
From this case we can state that change in the consumption of X will just compensate for a unit change in the consumption of Y and leave the consumers total utility constant. The movement of the set price from equilibrium e is due to increases X consumption by a certain unit of Y decrease. Thus the consumer values the certain units of Y as equivalent X decrease further, the marginal rate of substitution goes from 3 to 11.the marginal rate of substitution of Y for X falls as the consumer obtains more X. that is, the consumer values successive units of X and less and less in terms of Y. Therefore the slope of the consumers indifference curve measures the consumers marginal rate of substitution.
Every indifference curve reflects the market baskets along which the person is indifferent. Our utility function represented by indifference curve and on the other hand the budget constraints that consumer faces as a result of limited income, shown by budget line. People try to maximize their utility subject to his budget constraint. Depending upon ones income one should determine the preference of his buying and in this process a new term marginal utility has arisen. From the economic point of view marginal utility is diminishing i.e. per extra unit consumption of any good leads to decrease utility of such good.
The consumer optimizes his level of satisfaction by choosing market basket at the point of tangency between the indifference curve and budget line i. e. The slope of these two things must be equal. Here we mention one thing that, slope of indifference curve is equal to marginal rate of substitution between two goods and slope of budget line is equal to negative ratio of prices of two goods
MRSXY -(MUXMUY) -(PXPY)
Now we turn to another aspect of consumer theory that is if any price of good changes or income changes, how does a consumer react. If price of good changes, budget line rotates, then obviously equilibrium consumption bundle of such client changes with respect to income.
Public goods and private goods
Public goods are usually difficult to be provided by the private sector because of their nature. The principle of rival consumption does not apply to them that is, they can be consumed jointly by many individuals simultaneously such as security and defense of a country. In short it means that when one consumes a public does not take away take away from anyone elses share of those goods (Stonecash, Gans and King, 1995). The public good has the following characteristics
Public goods are often indivisible. You cant buy at certain price as it is difficult to produce and sold in small units.
Public goods can be used by more and more people at no additional cost. Once money has been spent on national defense, the defense protection you receive does not reduce the amount of protection bestowed on anyone else. The opportunity cost of your receiving national defense once it is in place is zero.
c) Additional users of public goods do not deprive others of any of the services of the goods. For example if one uses his radio a neighbors dont get weaker reception.
d) It is difficult to design a collection system for a public good on the basis of how much individuals use it. It is nearly impossible to determine how much any person uses or values national defense. No one can be denied the benefits of national defense for failing to pay for that public good. This is often called the exclusion principle (McTaggart, Finlay and Parkin, 2003).
Because of this nature it is difficult for private sector to offer public goods because it is so difficult to make a profit.