Question

Explain the concept of consumer equilibrium
graphically by using Cardinal utility analysis.
Write your answer​

Answer 1

Answer:

A consumer is said to be in equilibrium when he feels that he “cannot change his condition either by earning more or by spending more or by changing the quantities of thing he buys”. A rational consumer will purchase a commodity up to the point where price of the commodity is equal to the marginal utility obtained from the thing.

If this condition is not fulfilled the consumer will either purchase more or less. If he purchases more, MU will go on falling and a situation will develop where price paid will exceed MU. In order to avoid negative utility, i.e., dissatisfaction, he will reduce consumption and MU will go on increasing till P = MU.

Explanation:

On the other hand, if MU is greater than the price paid, the consumer will enjoy surplus satisfaction from the units he has already consumed. This will induce him to buy more and more units of the commodity leading to successive fall in MU till it is equated to its price. Thus, by a process of trial and error — by buying more or less units, a consumer will ultimately settle at the point where P = MU. Here, his is total utility is maximum.