What Does the Term Consumer Equilibrium Mean?
The term equilibrium implies the state of rest and there is no tendency to change. The equilibrium means the position of rest, which delivers maximum satisfaction or benefit under a given situation. A consumer is said to be at equilibrium when he does not intend to change his level of consumption i.e. when he derives maximum satisfaction. In other words, consumer equilibrium refers to a situation when a consumer attains maximum satisfaction with limited income and has no tendency to change the existing way of his expenditures.
Therefore, a rational consumer aims to balance his expenditures in such a way that he can attain maximum satisfaction with minimum expenditure. When he intends to do this, he is said to be in equilibrium. At the point of equilibrium, there are no incentives left with the consumers to make any changes in the quantity of the commodity purchased.
It is also assumed that consumers know the different goods on which they need to spend their income and the utility they are likely to get out of consuming such commodities. It implies that the consumer has perfect knowledge of different alternatives available to him.
The Concept of Consumer Equilibrium in Case of Two Commodities
The law of diminishing marginal utility that is applied only in the case of a single commodity, states that as more and more commodities are consumed, the marginal utility derived from each successive unit goes on diminishing. But in real-life situations, a consumer normally consumes more than one type of commodity. Therefore, in the case of two commodities, the law of equi-marginal utility is applied which helps consumers to optimally allocate their income. The law of equi-marginal utility states that a consumer will attain equilibrium when the ratio of marginal utility of one commodity to its price is equal to the ratio of the marginal utility of another commodity to its price.
Let a consumer buy two commodities i.e. X and Y. Then at equilibrium
\[\frac{Mux}{Px}\] = \[\frac{Muy}{Py}\] = Marginal utility of the last rupee spent on each good or simply Marginal utility of money (MUM)
Similarly, if a consumer buys three commodities such as X, Y, and Z, then the condition of equilibrium will be the simply marginal utility of money or MU of money.
\[\frac{Mux}{Px}\] = \[\frac{Muy}{Py}\] = \[\frac{Muz}{Pz}\] = MU \[_{money}\] - MU \[_{money}\]
Therefore to be in equilibrium,
The marginal utility of the last rupee spent on each good is the same.
The marginal utility of goods falls as more of it is consumed.
Let us now understand the consumer equilibrium in the case of two commodities with an example:
Suppose a consumer has only Rs.24 with him to spend on two commodities i.e. X and Y. Further, also assume that the price of each unit of good X is Rs.2 and the price of each unit of good Y is Rs.3. The marginal utility schedule of this example is given below.
From the above table, it is concluded that the consumer will get maximum satisfaction from spending his total income of Rs.24 if he buys 6 units of good X by spending Rs. 12 ( 2 6 = 12) and 4 units of good Y by spending Rs. 12 ( 3 4 = 12). This combination will provide maximum satisfaction to consumers (or state of equilibrium) because a rupee worth of MU in case of commodity X is 5 ( MUx/Px = 10/2 = 5) and in the case of commodity Y is also 5
( MUy/Py = 15/3 = 5)
(= Marginal Utility (MU) of the last rupee spent on each good).
It is important to note that maximum satisfaction of consumers is subject to budget constraints i.e amount of money spent by the consumer. In this example, Rs.24 is the total amount that a consumer will spend to buy two commodities i.e. X and Y.
What Happens When a Consumer is Not in an Equilibrium Position?
Assume that \[\frac{Mux}{Px}\] > \[\frac{Muy}{Py}\] . This implies that MU from the last rupee spent on commodity X is greater than the MU of the last rupee spent on commodity Y. This encourages the customer to transfer his expenditure from commodity Y to commodity X. As a consequence, MU rises and MUx falls. The process of transfer of expenditure on commodities continues until \[\frac{Mux}{Px}\] = \[\frac{Muy}{Py}\] .
FAQs on Consumer Equilibrium in Case of Two Commodity
1. What does the term marginal utility mean?
The term marginal utility refers to the additional utility which can be derived by consuming one more unit of commodity. In other words, marginal utility refers to a change in the per unit of consumption. Therefore, it is an additional utility that can be obtained by consuming one additional unit of commodity.
2. What does the term utility mean in economics?
In Economics, the term utility means the satisfaction an individual gets from the consumption of commodities. A utility is a measure of how much one enjoyed the movie, favourite sweets, or other dishes.
3. What is the condition of consumer equilibrium in the case of two commodities?
In the case of two commodities, the consumer attains the equilibrium when the ratio of MU of one commodity to its price is equal to the ratio of MU of another commodity to its price. Symbolically, the condition can be expressed as \[\frac{Mux}{Px}\] = \[\frac{Muy}{Py}\].
4. What are the assumptions of the indifference curve in the case of two commodities?
Two Commodities: It is assumed that the consumer has a fixed amount of money, and he has to spend the whole of his income on the two goods, given the constant prices of both goods. AA
Non-Satiety: It is assumed that the consumer has not reached the saturation point. He always prefers to have more of both commodities. He always attempts to move to a higher indifference curve to get higher and higher satisfaction.
Ordinal Utility: Consumers can rank their preference based on satisfaction obtained from the combination of consuming two commodities.
Diminishing Marginal Rate of Substitution: It means as the consumer substitutes more and more of one commodity i.e. X for another commodity i.e. Y, he or she will be prepared to give the consumer a lesser unit of another commodity i.e. Y for each additional unit of X.
Rational Consumer: The consumer is assumed to behave in a rationed manner i.e. he aims to maximize his total satisfaction.
5. What does the term indifference curve mean in the case of two commodities?
An indifference curve represents the combination of two commodities that gives a consumer equal satisfaction and utility and hence makes the consumer indifferent.