CONSUMER'S EQUILIBRIUM(UTILITY ANALYSIS)

CONSUMER'S EQUILIBRIUM (Utility Analysis) 

Consumer's equilibrium refers to a situation when a consumer maximises his satisfaction, spending his given income across different goods and services. 

Different cases of consumer's equilibrium

(1) When only one commodity is consumed

(2) When two or more commodities are 

     consumed. 

Consumer's Equilibrium: One Commodity Case

Purchase of a commodity by a consumer depends on three factors: 

(a) Price of a commodity. 

(b) Marginal utility of commodity. 

(c) Marginal utility of money. 

Marginal Utility of Money

Marginal utility of money refers to worth of a rupee to a consumer. A consumer defines it in terms of utility that he derives from a standard basket of goods that he can buy with a rupee. 

Diagram: One Commodity Case

From the above diagram it is clear that

(1) MUx is a downward sloping curve showing 

     that MUx declines as consumption of 

     commodity-X increases. 

(2)Px indicates market price of commodity-X.

    It is fixed. 

(3) Each point of MUx curve shows the MUx in 

     terms of money. It indicates price that the 

     consumer is willing to pay for each 

     successive unit of the commodity. 

(4) Equilibrium is struck at point C, when the 

      price he is willing to pay is exactly equal to 

     the price he actually pays. 

(5) When the price he is willing to pay is 

      greater than the price he actually pays, the 

      consumer makes a gain which is called 

     consumer surplus. 

Consumer's Equilibrium: Two Commodity Case

From the above figure it is clear that

(1) MUx is the marginal utility curve of 

     commodity-X. 

(2) MUy is the marginal utility curve of 

      commodity-Y. 

(3) Equilibrium is struck when MUx = MUy. 

      It occurs at point A, where MUx and MUy            lines intersect each other. Consumer                  strikes his equilibrium when he is in a state        of 'equi-marginal utility. 

Law of equi-marginal utility

Law of equi marginal utility states that the consumer strikes his equilibrium when the last rupee spent by him gives him equal marginal utility whether he spend it on Good-X or Good-Y. 

Assumptions of Consumer's Equilibrium

(1) Utility can be expressed in serial numbers 

     like 1,2,3...

(2) Marginal utility of money remains 

      constant. 

(3) Law of diminishing marginal utility holds 

      good. 

(4) Consumer behaves rationally, and aims at  

      the maximisation of his satisfaction. 

Principal Limitation of Utility Analysis

It relates to its basic assumption that utility can be expressed in terms of cardinal or serial numbers.