Conditions of Consumer’s Equilibrium Class 11 Notes

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 which provides the maximum benefits or gain under a given situation. Let us take a look at the conditions of consumer’s equilibrium and its meaning.

Consumer’s Equilibrium

A consumer is said to be in equilibrium when he does not intend to change his level of consumption, which is when he derives maximum satisfaction. A 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. A rational consumer aims to balance his expenditure in such a manner that he gets maximum satisfaction with the minimum expenditure. When this situation occurs, he is said to be in equilibrium. Given below are the conditions of consumer’s equilibrium in two cases –

1. Consumer spends his entire income on a Single Commodity
2. Consumer spends his entire income on Two Commodities

Conditions of Consumer’s Equilibrium in case of a Single Commodity

A consumer purchasing a single commodity will b at equilibrium when he is buying such a quantity of that commodity which gives him maximum satisfaction. The number of units of a commodity that are consumed depends on two factors – price of the given commodity and the marginal utility of each successive unit. A rational consumer will be at equilibrium when the marginal utility of a commodity is equal to its price. We know that MU is measured in utils and price is expressed in term of money. Therefore, MU in utils is expressed in term of money.

Marginal Utility in money = Marginal Utility in utils/ Marginal Utility of one rupee

This can also be written as –

MU_M = MU_X/P_X

A consumer in consumption of a single commodity will be at equilibrium when Marginal Utility of a commodity is equal to its price.

• If the marginal utility of a commodity, MU_x,is greater than the price of the commodity, P_x, i.e. MU_x > P_x, then the consumer is not at equilibrium. The consumer will go on buying more and more of the commodity because the utility derived from the commodity is greater than the price of the commodity and thus the consumer will benefit. As he buys more, MU falls because of the law of diminishing marginal utility. Gradually, MU becomes equal to price and equilibrium is attained.
• If the marginal utility of a commodity, MU_x,is lesser than the price of the commodity, P_x, i.e. MU_x < P_x, then also the consumer is not at equilibrium. The consumer will buy less and less of the commodity and this raises his total satisfaction till MU becomes equal to the price of the commodity.

Condition of Consumer’s Equilibrium in case of Two Commodities

In reality, no consumer will consume only one good. In such a situation, Law of Equimarginal Utility helps in optimum allocation of the consumer’s income. Law of Equimarginal Utility is based on the Law of Diminishing Marginal Utility. According to the law of Equimarginal Utility, a consumer gets maximum satisfaction when the ratios of the MU of two commodities and their respective prices are equal. . There are two necessary conditions of Consumer’s Equilibrium in case of two commodities. ,

1. The ratio of MU and price is same in case of both the goods. We know that in case of the consumption of a single commodity, say commodity X, the consumer is at equilibrium when,
   MU_M = MU_X/P_X.
   • Similarly, a consumer consuming another commodity, say commodity Y, will be at equilibrium when
     MU_M = MU_Y/P_Y
   • From both these equations we get,
     MU_X/P_X = MU_Y/P_Y = MU_M
   • As Marginal utility of money () is assumed to be constant, the above equilibrium condition can be written as,
     MU_X/P_X = MU_Y/P_Y
2. MU falls as consumption increases. This condition is necessary to attain consumer’s equilibrium. If MU does not fall as consumption increases, the consumer will end up buying only one good, which is unrealistic and the consumer will never reach equilibrium position.

For example, total income of the consumer is Rs. 5, which he wishes to spend on two commodities, X and Y. Both these commodities are priced at Rs. 1 per unit. So the consumer can buy a maximum of 5 units of X or 5 units of Y. We have shown the MU that the consumer derives from various units of X and Y in the table given below.

We can see that the first rupee will be spent on X since it has the utility of 20 utils, as against 16 utils of Y. The second rupee will be spent on commodity Y to get utility of 16 utils.

The consumer would reach equilibrium when : –

• MU of last rupee spent on each commodity is same – 4 units consumed
• MU falls as consumption increases

Suppose the consumer buys 3 units of X and 2 units of Y. Therefore,

• MU from last rupee (i.e. 5th rupee) spent on commodity Y gives the same satisfaction of 12 utils, as given by the last rupee (i.e. 4th rupee) spent on commodity X, and
• Mu of each commodity falls as the consumption increases.

The total satisfaction of 74 utils will be obtained when consumer buys 3 units of X and 2 units of Y. This reflects the consumer’s state of equilibrium. If the income is spent on any other combination, the satisfaction will be less than 74 utils.