What is Consumer Equilibrium?
Consumer equilibrium refers to a circumstance when an individual is content with his/her level of income. In such a situation, an individual also does not want to modify his/her manner of ongoing expenses.
A consumer is required to pay a certain amount for a particular unit of product. Hence, he/she cannot buy in unlimited numbers. The Law of Diminishing Marginal Utility states that utility obtained from every consecutive unit decreases gradually. Simultaneously, purchasing more units of product and goods will reduce a person’s income as well.
So, a sensible consumer will try to balance out his/her expenditure by making the least expenditure and gain the highest satisfaction. When an individual can do so, he/she is assumed to be in equilibrium. After a consumer reaches an equilibrium point, there is no reason for any modification in the quantities of availed products.
Here, we will explain consumer equilibrium in case of two commodities with the help of utility analysis.
Consumer Equilibrium in Case of Two Commodity
Practically, a buyer consumes more than one product. For such an instance ‘Law of Equi-Marginal Utility’ assists in allocating optimal income.
An individual wants to distribute his earnings between two products to achieve equilibrium. According to the law, a consumer receives utmost satisfaction when:
1. Marginal Utility Per Rupee is same for Both Commodities
It means that there are two essential grounds on which consumer equilibrium two commodity cases can be attained.
A consumer when consuming a single commodity (suppose X) is at equilibrium if MUX/PX = MUM. Similarly, a consumer consuming another product (assume Y) is at equilibrium if MUY/PY = MUM.
By equating the above two equations, it is found that MUX/PX = MUY/PY = MUM.
MUM is the marginal utility of one rupee spent on each product. The above equation can be restated like:
MUX/PX = MUY/PY or MUX/MUY = PX/PY
Next, let’s see what happens when MUX/PX is not the same as MUY/PY.
At MUX/PX > MUY/PY a consumer is receiving more MU for product X than for product Y. So, he/she will purchase fewer products (Y) and more products (X). Additional consumptions will eventually reduce MUX. A consumer will continue obtaining X products until MUX/PX = MUY/PY.
Now, when MUX/PX < MUY/PY, it’s just the opposite scenario.
It shows a conclusion that MUX/PX = MUY/PY is necessary to attain consumer equilibrium.
2. Marginal Utility Decreases When Consumption Increases.
This condition means that to achieve equilibrium, MU of a good has to reduce as its consumption increases. If MU does not decrease when consumption grows, a consumer will always purchase only one product. That is quite unrealistic, and he/she will never attain an equilibrium state.
To gain a more in-depth and thorough understanding of consumer equilibrium in two commodity cases and other crucial topics in Economics included in the senior secondary syllabus, you can refer to Vedantu’s website.