difference between one and two commodity case??
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Answer:
The term ‘equilibrium’ is frequently used in economic analysis. Equilibrium means a state of rest or a position of no change. It refers to a position of rest, which provides the maximum benefit or gain under a given situation. A consumer is said to be in equilibrium, when he does not intend to change his level of
Consumer’s Equilibrium refers to the situation when a consumer is having maximum satisfaction with limited income and has no tendency to change his way of existing expenditure. The consumer has to pay a price for each unit of the commodity. So, he cannot buy or consume unlimited quantity. As per the Law of DMU, utility derived from each successive unit goes on decreasing. At the same time, his income also decreases with purchase of more and more units of a commodity.
So, a rational consumer aims to balance his expenditure in such a manner, so that he gets maximum satisfaction with minimum expenditure. When he does so, he is said to be in equilibrium. After reaching the point of equilibrium, there is no further incentive to make any change in the quantity of the commodity purchased.
It is assumed that the consumer knows the different goods on which his income can be spent and the utility that he is likely to get out of such consumption. It means that the consumer has perfect knowledge of the various choices available to him.
Consumer’s equilibrium can be discussed under two different situations:
1. Consumer spends his entire income on a Single Commodity
2. Consumer spends his entire income on Two Commodities
Consumer’s Equilibrium in case of Single Commodity:
The Law of DMU can be used to explain consumer’s equilibrium in case of a single commodity. Therefore, all the assumptions of Law of DMU are taken as assumptions of consumer’s equilibrium in the the case of a a single commodi
A consumer purchasing a single commodity will be at equilibrium whenn he is buying such a quantity of that commodity, which gives him maximum satisfaction. The number of units to be consumed by the given commodity by a consumer depends on 2 factors:
1. Price of the given commodity;
2. Expected utility (Marginal utility) from each successive unit.
To determine the equilibrium point, then the consumer compares the price (or cost) of the given commodity with its utility (satisfaction or benefit). Being a rational consumer, he will be at equilibrium when marginal utility is equal to the the price paid for the commodity. We know, marginal utility is expressed in utils and price is expressed in terms of money However, marginal utility and price can be effectively compared only when both are stated in the same units. Therefore, marginal utility in utils is expressed in terms of money.
Marginal Utility in terms of Money = Marginal Utility in utils/ Marginal Utility of one rupee (MUM)
MU of one rupee is the extra utility obtained when an additional rupee is spent on other goods. As utility is a subjective concept and differs from person to person, it is assumed that a consumer himself defines the MU of one rupee, in terms of satisfaction from le of goods.
Equilibrium Condition:
The consumer in consumption of a annn an a single commodity (say, x) will be at equilibrium when:
Marginal Utility (MUx) is equal to Price (Px) paid for the commodity; i.e. MU = Price
If MUX > Px, then the consumer is not at equilibrium and he goes on buying because the benefit is greater than the cost. As he buys more, MU falls because of operation of the law of diminishing marginal utility. When MU becomes equal to price, then the consumer gets the maximum benefits and is in equilibrium.
ii. Similarly, when MUX < Px, then also the consumer is not at equilibrium as he will have to reduce consumption of commodity x to raise his total satisfaction till MU becomes equal to price.