In commerce subject, the word equilibrium is used regularly for economic analysis. Here, equilibrium indicates a position or state of no difference. It is a position that gives maximum profit and satisfaction in a given condition. In other words, a consumer is assumed to be in equilibrium when he does not want to improve his consumption level and is in the highest satisfaction
Consumer equilibrium also indicates a position when a consumer gets supreme satisfaction with restricted income and does not have any purpose of altering his current expense. The consumer pays for each component of the goods. Therefore, he cannot consume or purchase unlimited units.
Consumer equilibrium can be explained in two different conditions.
- When a consumer utilizes his whole income on a single commodity
- When a consumer uses his full income on two products
Consumer equilibrium in terms of a single commodity
When a consumer buys a single commodity, he is said to be in his equilibrium because it gives him the highest satisfaction and happiness. In this situation, the number of pieces the consumer consumes depends on two factors.
- Commodity price
- Expected satisfaction from each unit.
In these circumstances, the equilibrium point is determined by comparing the cost of a commodity with the satisfaction received. A reasonable consumer will achieve his equilibrium when the price paid for the goods is equal to marginal utility.
For a single commodity, equilibrium will be when:
Marginal Utility (MUx) is equal to Price (Px) paid for the commodity; i.e. MU = price
Consumer equilibrium in terms of a two commodity
We assumed for a single commodity the consumer spent his entire income on that single and received the maximum satisfaction. However, now the consumer desires to spent his salary on two products to achieve the equilibrium.
According to Equi-marginal utility law, a buyer obtains the highest satisfaction, when marginal utility ratio for two products are equal to their prices. Therefore, marginal utility decreases whenever consumption rises.
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