The state at which a consumer derives maximum utility from the consumption of one or more goods and services given his/her level of income is called consumer’s equilibrium. At that level of balance between total utility and income, the marginal utility of a product is equal to its one unit price.
For Consumers Equilibrium in Case of a Single Commodity, We Assume –
Consumer is rational and thus attempts to maximise his/her total utility
Fixed level of income of a consumer
Fixed price of a commodity in question
In the Case of Consumer’s Equilibrium for Two or More Commodities, We Assume that –
Consumer is rational and strives to maximise his/her total utility
Fixed level of income of a consumer
Fixed prices of commodities
Commodities are homogeneous or perfect substitutes
Parity between marginal utility and per-unit price
A consumer attains equilibrium at such level where marginal utility derived from the consumption of a commodity is equal to its one unit price.
Marginal utility is the change in the total utility of a commodity.
It is expressed as MU = TUn+1 - TUn
Here, MU stands for Marginal Utility
TU stands for Total utility
n stands for the number of units consumed
Such a point at which a consumer would attain equilibrium from the consumption of commodity ‘X’ would be expressed as MUx = Px
Here, Px stands for the price of one unit of commodity X and MUx stands for marginal utility of commodity ‘X’.
A rational consumer would continue to purchase more or less of a commodity until such marginal utility derived from it meets the price of that commodity.
If the marginal utility of a product is higher than its price, a consumer will consume more of it until marginal utility falls and reaches the price level.
Similarly, if the marginal utility of a product is lower than its price, a consumer would reduce his/her consumption until marginal utility climbs back to the fixed price level.
Illustration: The price of a packet of chips is Rs.10. The relation between the marginal utility derived from each packet of chips and its price is shown in the table below.
Up until the third unit, MU of a packet of chips was higher than its price. On the fourth unit, MU = P and satisfies the condition for attaining consumer’s equilibrium. On the fifth unit MU < P, i.e. consumer is deriving negative utility from the consumption of a fifth packet of chips.
A rational consumer would stop at 4 units when MU = P to maximise his/her utility.
MU curve intersects price level at downward segment
The marginal utility curve should intersect the price level when trending downwards. If there are two points at which the MU curve intersects the price level, one when moving upwards and another when travelling downwards, the latter would optimally satisfy the condition for meeting consumer’s equilibrium.
If an MU curve meets the price level when moving upwards, a consumer has the scope to derive more utility from additional consumption of a commodity. Therefore, a rational consumer would continue purchasing more.
If an MU curve intersects the price level when moving downwards, a consumer will derive negative utility from any additional consumption beyond that point.
Illustration: The price of a bar of chocolate is Rs.20. The relation between the marginal utility of a commodity and its price is elucidated in the table below.
Here, MU meets the price level at two different points A and B. At point A (2nd unit), the marginal utility intersects the price level on a rising trend. A consumer derives a higher utility from additional consumptions of the 3rd and 4th units. On the 5th unit, it intersects the price level at point B. Any additional consumption beyond this point shows a lower marginal utility than such price level and is undesirable for a rational consumer.
Marginal utilities of commodities should be equal
In the case of two or more commodities, the marginal utility derived from one commodity in proportion to its price should be equal to the marginal utility derived from a second commodity in proportion to its price.
It can be expressed as MU1/P1 = MU2/ = P2 … = MUn/Pn
Here, MU1 is the marginal utility of commodity 1 and P1 is its price.
If a consumer derives a higher MU/P from one commodity than the other, he/she will purchase more units of the former commodity from his/her given income than the latter until both MU/P components are equal.
It allows a consumer to maximise his/her utility from the consumption of one or more commodities.
It helps arrange the combination of two or more products based on consumer taste and preference for maximum utility.
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Consumer equilibrium is a point at which a consumer’s derived utility from a commodity is at its maximum, given a fixed level of income and price of that commodity. A rational consumer would not deviate from this point.
Consumers derive utility from each commodity they consume. This utility is dependent on the price of a product. The point at which the marginal utility (MU) of a product equals its price (P) is where consumer satisfaction maximises. It is expressed as MU = P. If the marginal utility of a product is higher than the price a consumer would continue to purchase additional units and vice versa until MU equals the fixed price level.