Consumer Equilibrium In Case of a Single Commodity

Consumer Equilibrium

It is the state of balance obtained by end users of products, which refers to the number of goods and services they can buy with their existing level of income and the prevailing level of cost prices. 

Consumer’s equilibrium permits a consumer to get the most satisfaction possible from his income.

Related link: Theory Of Consumer Behaviour

(A) Meaning of consumer’s equilibrium 

Consumer’s equilibrium means a state of maximum satisfaction.

Consumer’s equilibrium is a situation when a consumer spends his given income on the purchase of one or more commodities in such a way that he gets the maximum satisfaction and has no urge to change the level of consumption, given the prices of commodities.

 

(B) Condition of consumer’s equilibrium in case of a single commodity

The consumer will be in the state of equilibrium when the following condition is fulfilled:

The marginal utility of commodity ‘X’ in terms of rupees is equal to the price of commodity ‘X’ in rupees. [MUx (in Rs.) = Px (Rs.)]

Or

Mux (in utils) = Px (in Rs.) or MU of commodity ‘X’ (in utils) = Px (in Rs.)

MUm (in utils) MU of money (a rupee) (in utils)

(C) Hypothetical Schedule/ Numerical ExampleLet us take anthe example of fruit ice -creams. The price of one scoop of an ice -cream scoop is Rs. 30 and the MUm, i.e., MU of money (Re.1) = 1 util.

Units Consumed

 

MU of one scoop of ice -cream 

(in utils) {a}

 

MU of money

(Rs.e 1)

(in utils)

{b}

 

MU of one scoop of ice -cream 

(in Rs.)

= {a}/ {b}

 
 

Price of one scoop of ice -cream

(Rs.)

1

2

3

4

5

50

40

30

20

10

1

1

1

1

1

50

40

30

20

10

>

>

=

<

<

30

30

30

30

30

(D) Explanation and conclusionIn the given example, the level of consumer’s equilibrium is 3 units.

Where,

MU of ice cream in rupees = Price of ice cream in rupees,  i.e., Rs.30.

  •     Before this level, i.e., at 1st and 2nd level, MU > Price, i.e., the benefit is more than the cost. So, the consumer will increase the consumption to attain equilibrium.
  •     After this level, i.e. at 4th and 5th level, MU < Price, i.e., the benefit is less than the cost. So, the consumer will cut or decrease the consumption to be in the state of equilibrium. Only at the level of 3 units, the condition of consumer’s equilibrium is fulfilled.
  •    A consumer will consume as much quantity at which MUx = Px to be in the state of equilibrium.
Important Topic in Commerce:

Lets Practise

1. If MUx> Px, the consumer

A. Has reached the equilibrium

B. Has started incurring losses

C. Can consume more of X

D. Must stop consuming X

Answer: C. Can consume more of X

2. A consumer gets maximum satisfaction when the ____________are same.

A. Total utility and marginal utility

B. Price of commodity and marginal utility

C. Price of commodity and total utility

D. (a) and (b) both

Answer: B. Price of commodity and marginal utility

3.Equilibrium means state of maximum _____________ ?

Answer: Satisfaction