Question

Utility analysis and consumers equilibrium :one commodity case? simple language answer with examples

Answer 1

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 case of a single commodity.

A consumer purchasing a single commodity will be at equilibrium when he is buying such a quantity of that commodity, which gives him maximum satisfaction. The number of units to be consumed of 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, 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 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)