Question

Explain the condition for consumers equilibrium with the help of marginal utility analysis

Answer 1

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Consumer's equilibrium - Consumer's equilibrium may be defined as a situation under which a consumer gets maximum level of satisfaction within his given money income and given market prices of commodities.

Marginal utility - Marginal utility is an addition made to total utility by consuming an additional unit of a commodity.

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Answer -:

The conditions for consumer's equilibrium given by the marginal utility analysis are :

(i) One commodity case

(ii) Two commodity case

A consumer is said to be in equilibrium, when he is spending his given income on various goods in such a way that maximises his satisfaction.

→ Condition of consumer's equilibrium in case of a single commodity : Consumer's equilibrium in case of a single commodity is attained when the marginal utility of the commodity measured in terms of money is equal to its price. Symbolically, $MU_{x}=P_{x}$

→ Condition of consumer's equilibrium in case of a two commodity : Consumers's equilibrium in case of two commodities is attained when the ratio of the marginal utilities of two goods and their prices is equal, i.e., $<em> </em>\frac{MU_{x}}{P_{x}} = \frac{MU_{y}}{P_{y}}$

This is, however, subject to the budget constraints that the money spent just equals income, i.e.,

$P_{x} × Q_{x} + P_{y} × Q_{y} = M$