Consumer Equilibrium

EconomicsArticles / Tutorial Titles

Introduction

When we say something is in equilibrium, we mean that there is a static phase where no changes need to be made. Equilibrium can be obtained in the case of consumption too. In the case of consumption, when a consumer does not require more items or when his/her satisfaction is at the maximum level given his/her income and the price of the product in the market; he/she is said to have attained a consumer’s equilibrium phase.

Consumer equilibrium is an important concept in economics. It helps consumers maximize their utility while they consume one or more goods or commodities. It helps the consumers to prepare a combination of two or more goods based on consumer preference and tastes to maximize the utility of the products.

Consumer Equilibrium: Definition

A consumer is said to be in equilibrium when he cannot change his consumption pattern by earning more, spending more, or by buying more of the products. Usually, a rational consumer buys a product until the point where the price of the product is equivalent to the marginal utility (MU) of the product.

When this mentioned condition is unfulfilled, the consumer will either buy more or less. When the consumer buys more, the MU will go down and a situation will arrive when the price of the products will exceed MU. To prevent negative utility or dissatisfaction, the consumer will reduce his consumption and MU will rise again until the price equals MU.

In the other case where marginal utility is greater than paid price, the consumer will buy more to satiate his desire. This will lead to a gradual fall in MU till it gets equal to the price.

Therefore, by purchasing more or less of a product, the consumers can reach a point where the Price of the product is equivalent to MU. This point is called the point of consumer equilibrium.

Assumptions for Attaining Consumer Equilibrium – in Case of Single Commodity

In the case of attaining consumer equilibrium, some assumptions need to be observed. These assumptions are the following:

  • The condition will be related to only a single product.

  • The price of the commodity is already given in the market, so the consumer only gets to decide the amount of commodity to buy at the given price level.

  • All rational human beings will tend to increase their consumer surplus. This surplus is related to the extra amount the consumer earns over the expenditures of the selected goods at the point of purchase (PoP).

  • There is no limit or restriction to the amount of commodity the consumer purchases. He has the ability to buy as much amount of commodity as he wants from the market at the market's stated price.

Conditions for Consumer Equilibrium – in Case of Single Commodity

Consumer equilibrium in the case of a single commodity can be explained with the help of the law of diminishing marginal utility. The law states that with the increase of consumption, the utility (marginal utility) derived from each additional unit goes on to decrease.

Therefore, consumption patterns or how much to consume depends on the following two factors:

  • The price of the product which is given, and

  • The utility a consumer gets from the product

Therefore, while purchasing a commodity, the consumer compares the price of the commodity with its utility. When the marginal utility of the commodity calculated in terms of price equals the real price of the commodity then an equilibrium is established.

Say for product x, in the case of equilibrium

MUx = Px

If  MUx  >  Px

When the marginal utility of the product is more than the price of the product, the consumer will go on to consume more of the product because she will be getting less MU with each successive purchase. When this is carried on, at some point in time, the price paid will exceed the marginal utility.

So, to avoid dissatisfaction, the consumer will reduce consumption until MUx = Px is obtained.

In the case of MUx = Px,

When the marginal utility of a product is less than the price of the product, the consumer will reduce consumption of the product. This will go on until MU equals the price of the product. This is so because the consumer is paying more than the additional amount of satisfaction she is paying for.

Assumptions for Attaining Consumer Equilibrium – in Case of two or more Commodities

In the case of two commodities, the assumptions for attaining consumer equilibrium are:

  • The consumer purchases only two goods.

  • The consumer can't decide or influence the price of the goods that are fixed in the market. He/she can only decide how much to buy for each item.

  • The income of the consumer which will be spent on these items is given and it cannot change over time.

  • As a rational human being, the goal of the consumer is to maximize the amount of utility from his/her purchases and consumption of goods which is related to his constraints too.

Conditions for Consumer Equilibrium – in Case of Two or More Commodities

The law of diminishing marginal utility is not applied in the case of the purchase of two or more commodities. In contrast, the law of equal marginal utility is used in the case of the determination of consumer equilibrium of two or more commodities.

The law of equal marginal utility states that the consumer should spend his income on two or more goods so that the last rupee spent on each item provides equal marginal utility so that consumers can obtain maximum satisfaction.

According to equal marginal utility, the ratio of marginal utility of one product with its price will be equal to the ratio of another product’s marginal utility to its price.

$\mathrm{\frac{MUx}{Px}\:=\:\frac{MUy}{Py}\:=\:\frac{MUz}{Pz}}$

Therefore, to attain an equilibrium, we must remember the following notes:

  • The marginal utility of the last rupee spent should be the same for all goods.

  • The marginal utility of an item falls more as more of it is consumed.

Conclusion

Without the knowledge of consumer equilibrium, the consumers may overspend on some items which will lead to wastage. In order to be lean and correct in preparing budgets, the consumers may take the help of consumer equilibrium.

Consumer equilibrium is a concept related to satisfaction obtained from consumption. Hence, it is related to the demand and supply of products in markets. Consumer equilibrium is an unavoidable calculation for markets to be efficient. Economists usually determine the strength of consumption of a population using consumer equilibrium and so it is a matter of concern for social good and justice too.

FAQs

Q1. Which law is applied in the case of the calculation of consumer equilibrium for two or more commodities and why?

Ans. The law of equal marginal utility is applied in the case of consumer equilibrium of two or more commodities. This is done to determine the optimum resource allocation of the consumer.

Q2. Can the marginal utility be negative?

Ans. Yes. In case there is dissatisfaction after consuming a commodity, there will be a negative marginal utility for the consumption.

Q3. What is the relation between marginal utility and cost for consumer equilibrium?

Ans. For consumer equilibrium, the marginal utility derived from a commodity must equal the price or cost of the commodity.

raja
Updated on 13-Oct-2022 11:19:47

Advertisements