2. ConsumerEquilibrium
• A situation where a consumer spends his given income
purchasing one or more commodities so that he gets
maximum satisfaction and has no urge to change this
level of consumption, given the prices of commodities, is
known as the consumer's equilibrium.
3. Importance of Consumer Equilibrium
• It enables consumers to maximize his utility from the
consumption of one or more commodities.
• It helps the consumers to arrange the combination of
two or more products based on consumer taste and
preference for maximum utility.
4. Utility
• It is a measure of satisfaction an individual gets from
the consumption of the commodities. In other words,
it is a measurement of usefulness that a consumer
obtains from any good.
• Similarly, if you eat your favorite ice-cream you will
be happy. What will happen in the second round?
Happy, Right? Will you be satisfied one after the other
rounds? No!
5. Types of Utility
• Total Utility : Thesumofthetotal satisfaction fromtheconsumptionof
specificgoods orservices. Itincreasesas moregoods areconsumed.
T.U.=U1+ U2+… +Un
Or
TU=SigmaMU
6. • Marginal Utility : It is the additional satisfaction
gained from each extra unit of consumption. It
decreases with each additional increase in the
consumption of a good.
M.U.= Δ TU/ Δ Q
Average Utility : One can obtain it by dividing the total
unit of consumption by the number of total units.
Suppose there are total n units, then A.U.= T.U. /
Number of units
7. ASSUMPTION
• What are the Assumptions for Attaining Consumer
Equilibrium in the Case of Single Commodity?
• In the case of a single commodity, let’s assume
• The purchase would be restricted only to the single
commodity
• The price of the commodity is already given in the market.
The consumer only determines how much he needs to
purchase at a given price.
• Being a rational human being, the goal of a consumer is to
maximize the consumer surplus which implies the surplus of
utility he earns over his expenditures on the good at the point
of purchase.
8. • What are the Conditions for Consumer Equilibrium in the
Case of Single Commodity?
• In the case of a single commodity, the consumer equilibrium
can be explained on the basis of the law of diminishing
marginal utility. The law of diminishing marginal utility states
that as consumers consume more and more units of
commodities, the marginal utility derived from each
successive unit goes on diminishing. Therefore, how consumers
decide how much to purchase depends on the following two
factors.
• While purchasing a unit of a commodity, a consumer compares
the price of the given commodity with its utility. The
consumer will be at an equilibrium stage when marginal utility
(in terms of money) gets equal to the price paid for the
10. In case MUx < Px
InthecasewhenMUxisless thanprice,,the consumerwill have tominimizehis
consumptionofthecommodity toraisehistotal satisfaction tillMUbecomes equalto
price.Thisisbecausesheis payingmore thanthe additionalamountof satisfactionshe is
getting.
Inthecaseofasinglecommodity,the consumerequilibriumcanbewell-explained with
thehelpofanexamplegiven below.
11. • What are the Assumptions for attaining Consumer
Equilibrium in the Case of Two or More Commodities?
• The consumer purchases only two goods i.e. A and B.
• The price of both the goods is already given in the market. The
consumer cannot change or influence the price of both the
goods. He can only decide how much to buy of these goods at
a given price.
• The consumer's income to be spent on these goods is already
given and is constant.
• The consumer is a rational human being and his goal is to
maximize the (cardinal) amount of utility from his purchase
and consumption of the goods subject to his constraints.
12. • What are the Conditions for Consumer Equilibrium in the
Case of Two or More Commodities?
• The law of diminishing marginal utility is not applied
in the case of two or more commodities. In real-life
scenarios, a consumer normally consumes more than
one commodity. In such a situation, the law of equity-
marginal utility is applied as it helps him to determine
the optimum allocation of his income. The law of equi-
marginal utility states that a consumer should spend
his limited income to purchase different commodities
in such a way that the last rupee spent on each
commodity provides him equal marginal utility in order
to attain maximum satisfaction.
13. Conclusion
• To sum up what consumer equilibrium is? Consumer
Equilibrium refers to the situation when a consumer is
enjoying maximum satisfaction with limited income and has no
propensity to change his way of existing expenditure. The
consumer has to pay a price for each unit of the commodity he
consumes. So, he cannot purchase or consume an unlimited
quantity of commodities. In the case of a single commodity,
the consumer attains an equilibrium position when the
marginal utility of a good in terms of money gets equivalent to
the price of that good.
