CONSUMER’S EQUILIBRIUM- ONE COMMODITY CASE

 

 Learning Contents:                                                            

·         Concept of Consumer’s Equilibrium.

·         Consumer’s Equilibrium-Schedule and Diagram: One commodity case.  

Introduction

As we all know that, a consumer pays some price to buy different goods and services, and also he cannot satisfy all his wants with the limited income. As per the law of diminishing marginal utility which states that utility derives from the consumption of each successive unit goes on falling. At the same time income also falls with the purchase of more and more units of goods and services. A rational consumer is one who plans to buy the goods and services in such a way that he gets more and more satisfaction while spending less amount of income. It is called consumer equilibrium.

Consumer Equilibrium:

Consumer equilibrium refers to a situation of maximum satisfaction while spending the given income on different goods and services and has no desire to change the level of consumption or expenditure, given the prices of commodities. Any deviation or change in the allocation of income under the given circumstance will lead to a fall in total satisfaction or total utility.

In simple words, it is meant to say that  the price a consumer  has paid for acquiring goods and services is  giving an equal worth of satisfaction(utility) or not.

Consumer equilibrium can be studied in two different situations:

1.      When consumer spends entire his income on a single commodity.

2.      When consumer spends entire his income on two commodities.

1. Single/One commodity- Consumer’s equilibrium

A consumer is said to be in equilibrium at a point when the utility received gets equal to the price paid. At this point, his total utility is the maximum. He is said to be in equilibrium at this point because he is getting maximum satisfaction and he will buy neither more nor less. Only a change in price will lead to a change in the quantity demanded. The number of units to be purchased by the consumer depends on three factors:

1. Price of the given commodity

2. Marginal utility from each successive unit (MUx)

3. Marginal Utility of money (MU_m)

Assumptions of single commodity consumer equilibrium

The assumptions of the Law of the Diminishing marginal utility will be the same for explaining consumer’s equilibrium in the case of a single commodity as it is guided by LDMU.

1. A consumer is rational and thus tries to maximize his/ her utility.

2. Income of the consumer is fixed.

3. There is no change in the price of the commodity.

4. Utility is cardinally measurable.

 

Conditions of Consumer Equilibrium-One Commodity Case

1.      MU_x( in terms of rupees)= P_x

MU_x (in terms of rupees) = MU_x (utils)/MU_m (utils)

        OR

MU_x/MU_m =P_x

The reason behind this is the price paid by the consumer should be exactly equal to the money value of the marginal utility he drives. The three different situations a consumer faces during the purchase of goods and services are explained below:

Situations	Action of the consumer	What will happen?
When Px<MUx(in terms of money)	Consumer will  desire to buy more of Good-X	Higher consumption of Good-X will lead to fall in Marginal utility.
When Px>MUx(in terms of money)	Consumer will  desire to buy less of Good-X	Marginal utility will fall for  Good-X
A consumer will stop the consumption only when Px=MUx( state of consumer equilibrium)

1.      Marginal utility of money remains constant.

2.      Law of diminishing marginal utility applies.

                                         IMP. CONCEPT TO UNDERSTAND

Marginal utility of money (MUm): Marginal utility of money means ‘what is the value of a rupee to a consumer’. The value of a rupee differs from person to person like a rich person does not give much importance to the value of a rupee where as a poor person gives more importance to the value of a rupee. How much worth of satisfaction a consumer receives from spending a rupee is called as the marginal utility of money. For e.g. spending or not a rupee gives a consumer the satisfaction of 2 utils is called as the marginal utility of money.

Explanation: The following observations can be noted in the below-mentioned diagram

1.     MU_x is a downward sloping curve showing that MU_x declines as consumption of x commodity increases.

2.     P_x  indicates the market price of the commodity-X It is fixed for the consumer irrespective of any number of units he purchases equals to ₹4

3.    Each point on the MU_x curve shows the MU_x in terms of money. It indicates the price that the consumer is willing to pay for each successive unit of the consumer.

4.       Consumer equilibrium is achieved at point A when the price consumer is willing to pay is exactly equal to the price he actually pays. In a state of equilibrium, the consumer buys 3 units of commodity-X.

5.      Till the time the price a consumer is willing to pay is greater than the price he actually pays, the consumer makes again, which is called consumer surplus.

Table 1 showing Consumer equilibrium single commodity case