Consumer Equilibrium Utility Analysis

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Consumer Equilibrium

The state of being balanced that is obtained by an end-user of the products which refers to the number of goods and services which the consumers can buy, given their level of income and the prevailing cost prices is called the consumer’s equilibrium. Consumer equilibrium permits the customer to get maximum satisfaction that is possible from their income.

A rational consumer will purchase a commodity to a point where the price of the commodity is equal to the marginal utility that is obtained from the product. If the condition is not fulfilled then the consumer will either purchase more or less of the commodity.

Consumer Equilibrium Utility Analysis

When a consumer is purchasing a specific commodity, and then he stops buying that particular commodity as the price and the utility have been equated.

At this point, the total utility is maximum at this level. The consumer is said to be in equilibrium at this point because he is getting maximum satisfaction derived from the commodity and he will buy neither more nor less of the commodity. That means the consumer reached his level of satiety.

While, if there is a change in the price then it will lead to a change in the quantity demanded.

Equilibrium With More Than One Commodity

Agreeing with the Marshallian utility analysis, when the expenditure of a consumer has been completely adjusted, which means, when the marginal utility of the consumer each direction of his purchases is quite the same, then this is called consumer’s equilibrium. In this case, he has no desire to buy any more of one commodity or any less of another commodity.

With the set market prices, the consumers too want his income, which the consumer is said to be in equilibrium when the marginal utilities are being equalized and so the maximum satisfaction is obtained. After this, there will be no inducement to revise the scheme of this expenditure. The consumer will have to continue to buy the same commodities with the same quantities and until and unless either of the income or his wants or the prices change. Adjustment of these wants to one another and to his own environments is a sign of consumer’s equilibrium. For a consumer in order to be in equilibrium with respect to all the goods that are bought, this the marginal significance of all goods in terms of the value of money which is to be equal with their money prices.

To derive the maximum satisfaction from the amount of money that a consumer has, he will be required to apportion his expenditure with that of the marginal utilities of the goods purchased which will be in proportion to their prices.

Thus, a consumer will be in equilibrium when,

M.U. of X /price of X = M.U. of Y / price of Y/ M.U. of Z / price of Z = k

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Conditions of Consumer Equilibrium

A consumer is in equilibrium with his tastes, and the price of the two goods, which he spends a given money income on the purchase of two goods in a way as to get the main satisfaction. According to Koulsayiannis, “The consumer is in equilibrium when he maximizes his utility, given his income and the market prices.”

Consumer Equilibrium in a Single Commodity Case

  • The purchase should be restricted only to a single commodity.

  • The price of the commodity is the price which is existing in the market. The consumer will only determine the quantity to buy at the given price.

  • The consumer is only a rational human being and, so, the goal of the consumer is to maximize the consumer’s surplus which only means that the surplus of this utility which he incurs over the expenditure on the good at the point of the commodity’s purchase.

  • There is no problem with the consumer’s expenditure, i.e., he has only sufficient money to buy whatever quantity he decides to buy to achieve his own goal.

Consumer Equilibrium Formula

The formula for Consumer’s Equilibrium is as follows:

Consumer’s Surplus = total utility obtained – total expenditure

(at the consumer’s equilibrium point)

= total utility – price x quantity purchased

= total utility – marginal utility x quantity purchased

Importance of Consumer Equilibrium

The state of balance that is obtained by an end-user of products refers to the number of goods and services they can buy, given their existing level of income and the prevailing level of cost prices. Consumer equilibrium denotes the satisfaction which is attained by a customer which signifies his most satisfaction possible from their income.

FAQ (Frequently Asked Questions)

1. What is Satiety?

Ans. A mortgage is a type of loan which the borrower uses to purchase or to maintain a home or other form of real estate and who agrees to pay back over the time period, typically in a series of regular payments. The property serves as collateral to secure the loan.

A mortgage is a way to use the real property as the guarantee for a loan to get the money. The debtor or the mortgagor is the owner of this property, while the creditor or mortgagee is the owner of the loan which is in question. When the mortgage is in a transaction which is made, the debtor gets the money with this loan and promises to pay this loan.

2. Explain the Marshallian Utility Analysis.

Ans. Marshall's cardinal utility analysis is grounded on the principle that the hypothesis of the independent utilities, which means that the utility that the consumer derives from any commodity is only a function of the quantity of which the commodity and only of that commodity alone.

3. How Would You Define ‘Want’ in Economics?

Ans. In economics, a want is something that is only desired by an individual. The concept goes as that every person has unlimited wants, but only the limited resources (economics is based only on the assumption that only the limited resources are only available to us). Thus, people cannot have everything which they want and must look for the most affordable alternatives which are available within their scope.