Question

With the aid of diagram discuss the equilibrium condition of a consumer

Answer 1

Answer:

Consumer's Equilibrium (With Diagram) ADVERTISEMENTS: ... 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

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Answer 2

Answer:

Consumer’s Equilibrium (With Diagram)

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In this article we will discuss about the concept of consumer’s equilibrium, explained with the help of suitable diagrams and graphs.

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.

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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.

Necessary and sufficient conditions of consumer's equilibrium

However, P = MU is a necessary but not a sufficient condition for a consumer’s equilibrium. In Fig. 4, we find that the MU curve is intersecting the price curve PP at two differ­ent points M and N. So far M is concerned, although by having OA quantity the consumer is reaching the point where P – MU but it is not equilibrium.

For by purchasing extra units above OA he can enjoy surplus satisfaction. Why then will he stop at OA? He will continue using the thing till he reaches OB. If he goes beyond this point, for every extra unit P is greater than MU and he shall have to suffer dissatisfaction. Thus, the sufficient condition of consumer equilibrium is that the MU curve must cut the price curve at its downward segment and not at its rising segment.

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The objective of a rational consumer is to maximise utility (wel­fare) subject to:

(1) A fixed level of money income

(2) A fixed set of commodity prices.

Now, what is fundamental equilibrium condition that has to be satisfied if a consumer is spending his income on different goods so as to make himself truly best off in terms of utility or satisfaction?

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