Consumer Equilibrium - Simplified for Class 11 with Notes and Formula

Equilibrium refers to a state of balance where nothing wants to change. A consumer is in equilibrium when they don't feel the need to change how much they consume, meaning they have reached their highest level of satisfaction. Consumer equilibrium happens when a person gets the most satisfaction possible from the goods they buy, based on their income and the prices of those goods. Read the article below to learn more about consumer equilibrium.

Consumer Equilibrium Diagram

Consumer Equilibrium

What is Consumer Equilibrium?

A consumer is in equilibrium when they feel that they can't improve their situation by earning more money, spending more, or changing the number of things they buy. A smart consumer buys goods in such a way that the price of the product is equal to the extra satisfaction (marginal utility) they get from it.

If this balance is not met, the consumer will adjust their buying habits. If they buy more, the extra satisfaction (marginal utility) decreases, and at some point, the price they pay will be higher than the satisfaction they get. To avoid feeling dissatisfied, they will reduce their consumption, and the extra satisfaction will increase until the price equals the marginal utility.

On the other hand, if the satisfaction from a product is higher than the price, the consumer will want to buy more, but as they continue buying, the extra satisfaction will decrease until it matches the price. Eventually, by adjusting how much they buy, the consumer will reach a point where the price equals the marginal utility, and at that point, their total satisfaction (utility) is at its highest.

Importance of Consumer Equilibrium

• It helps consumers get the most satisfaction from the products they buy.

• It assists in finding the best mix of products based on personal preferences to maximize satisfaction.

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.

• There are no limitations on the consumer expenditure i.e. he has sufficient money to buy whatever quantity he decides to buy at a given price.

What are the Assumptions for attaining Consumer Equilibrium in the Case of Two or More Commodities?

In the case of two or more commodities, let’s assume:

• The consumer purchases only two goods i.e. A and B.

• The price of both goods is fixed in the market, and the consumer cannot change or affect these prices. The consumer can only decide how much of these goods to buy at the given prices.

• The amount of income the consumer has to spend on these goods is fixed and doesn't change.

• The consumer is a rational person, and their goal is to get the most satisfaction or benefit from buying and using these goods while working within their budget.

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.

• The price for each unit which he/she pays is given

• The utility he/she gets

When buying a product, a consumer compares its price with the satisfaction or benefit they get from it. The consumer reaches a balanced point when the extra satisfaction (in money terms) equals the price they paid for the product, let's call it 'X'. This means:

MUx = Px

Note: To find the marginal utility in money, divide the satisfaction (in utils) by the satisfaction gained from spending one rupee.

In case MUx > Px, 

In the case when MUx is greater than price, the consumer goes on buying the commodity because she is paying less for each additional amount of satisfaction he is getting. As she buys more, MU will fall and situations will arise when the price paid will exceed marginal utility ( the concept of the law of diminishing marginal utility is applied here). In order to avoid this situation i.e. dissatisfaction, he will minimize his consumption and MU will go on increasing till MUx = Px. This is the state of equilibrium.

In case MUx < Px, 

In the case when MUx is less than price,, the consumer will have to minimize his consumption of the commodity to raise his total satisfaction till MU becomes equal to price. This is because she is paying more than the additional amount of satisfaction she is getting.

In the case of a single commodity, the consumer equilibrium can be well-explained with the help of an example given below.

Example:

In the below example, assume that the consumer wants to buy goods that are priced at Rs.10 per unit. Also, assume that MU obtained from each successive unit is determined. Assume that 1 util is equals to Re.1

In the above table, we can see that the consumer will be at equilibrium when he buys 3 units of commodity X. He will increase his consumption beyond 2 units as MUx > Px. The consumer will not consume 4 units or more of the commodity X as MUx < Px.

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.

According to the law of equi-marginal utility, a consumer will be in equilibrium when the ratio of marginal utility of one commodity to its price is equal to the ratio of marginal utility of another commodity to its price.

Let us assume that consumers buy two goods i.e.  X and Y.  Then the equilibrium price stage will be at

MUx/Px = MUY/PY = MU of the last rupee spent on each commodity or simply can be said MU of Money.

\[\frac{MUx}{Px}\] =  \[\frac{MUy}{Py}\] = \[\frac{MUz}{Pz}\]= MU\[_{money}\]   - MU\[_{money}\]

Similarly, if there are three commodities i.e. X, Y, Z then the condition of equilibrium, in this case, will be simply MY Money. 

Thus, to attain an equilibrium position

1. Marginal utility of the last rupee spent on each good is the same. 

2. Marginal utility of a commodity falls as more of it is consumed.

Let us understand the consumer’s equilibrium in the case of two commodities with an example. Suppose a consumer has to spend ₹. 24 on two commodities i.e. X and Y. Further, assume that the price of each unit of X is 2 and that of Y is 3 and his marginal utility schedule is given below.

To attain the maximum satisfaction from spending his income of ₹. 24, the consumer will buy 6 units of X by spending Rs. 12 ( 2 × 6 = Rs.12) and 4 units of Y by spending Rs. 12 ( 2 × 6 = Rs. 12). 

This combination of goods gives him maximum satisfaction (or state of equilibrium) because a rupee worth of MU in the case of good X is 5 i.e.

\[\frac{MUx}{Px}\] = \[\frac{10}{2}\]

In the case of good Y also. It is 5 i.e.

\[\frac{MUy}{Py}\] = \[\frac{15}{3}\]

(= MU of the last rupee spent on each good)

Note: Consumer’s maximum satisfaction is determined by the budget constraints i.e. the amount of money spent by consumers (₹24 in this example).

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.