How do you prove consumer equilibrium?
The consumer equilibrium is found by comparing the marginal utility per dollar spent (the ratio of the marginal utility to the price of a good) for goods 1 and 2, subject to the constraint that the consumer does not exceed her budget of $5.
How consumer equilibrium can be achieved with the help of utility analysis?
In order to decide the point of equilibrium, the user compares the cost or price of the commodity with its benefit or utility. Therefore, when the marginal utility is and the price paid for the commodity is equal, the rational consumer will be at equilibrium.
What causes consumer equilibrium?
A consumer is in equilibrium when he maximizes his satisfaction subject to a limited money income and given market prices of goods and services.
What is equilibrium of consumer and how it is determined?
Consumer's Equilibrium means a state of maximum satisfaction. A situation where a consumer spends his given income purchasing one or more commodities so that he gets maximum satisfaction and has no urge to change this level of consumption, given the prices of commodities, is known as the consumer's equilibrium.
How consumer equilibrium is achieved using the indifference curve?
Consumer equilibrium refers to a situation, in which a consumer derives maximum satisfaction, with no intention to change it and subject to given prices and his given income. The point of maximum satisfaction is achieved by studying indifference map and budget line together.
What do you understand by consumer equilibrium give logical reasoning as to how he reaches his state of equilibrium?
Consumer equilibrium is the state when the consumer balances his income and his purchase value. The consumer reacts proud of himself when he made a perfect balance between his expense and the expenditure. This equilibrium will be made when the income remains somewhat after spending for purchasing all the goods.
1. Define consumer equilibrium?
Consumer equilibrium is a point at which a consumer’s derived utility from a commodity is at its maximum, given a fixed level of income and price o...
2. Explain the concept of consumer equilibrium?
Consumers derive utility from each commodity they consume. This utility is dependent on the price of a product. The point at which the marginal uti...
3. Define utility.
The utility is defined as the want satisfying power of goods. The more they need for the particular commodity or the strong desire to have it, the...
4. What does marginal utility mean?
Marginal utility or MU is the change in total utility due to the consumption of one additional unit of a commodity. For example, suppose 5 mangoes...
5. What does total utility mean?
Total utility or TU of a fixed quantity of a commodity is defined as the total satisfaction derived from consuming the given amount of some commodi...
How to find equilibrium of a consumer?
The consumer equilibrium is found by comparing the marginal utility per dollar spent (the ratio of the marginal utility to the price of a good) for goods 1 and 2 , subject to the constraint that the consumer does not exceed her budget of $5. The marginal utility per dollar spent on the first unit of good 1 is greater than the marginal utility per dollar spent on the first unit of good 2 (12 utils > 9 utils). Because the price of good 1 is $2 per unit, the consumer can afford to purchase this first unit of good 1, and so she does. She now has $5 − $2 = $3 remaining in her budget. The consumer's next step is to compare the marginal utility per dollar spent on the second unit of good 1 with marginal utility per dollar spent on the first unit of good 2. Because these ratios are both equal to 9 utils, the consumer is indifferent between purchasing the second unit of good 1 and first unit of good 2, so she purchases both. She can afford to do so because the second unit of good 1 costs $2 and the first unit of good 2 costs $1, for a total of $3. At this point, the consumer has exhausted her budget of $5 and has arrived at the consumer equilibrium, where the marginal utilities per dollar spent are equal. The consumer's equilibrium choice is to purchase 2 units of good 1 and 1 unit of good 2.
What is the equilibrium choice of a consumer?
The consumer's equilibrium choice is to purchase 2 units of good 1 and 1 unit of good 2. The condition for consumer equilibrium can be extended to the more realistic case where the consumer must choose how much to consume of many different goods.
What happens to the marginal utility of good 1?
After purchasing more and more of good 1, the marginal utility of good 1 will eventually fall due to the law of diminishing marginal utility, so that the marginal utility per dollar spent on good 1 will eventually equal that of good 2. Of course, the amount purchased of goods 1 and 2 cannot be limitless and will depend not only on ...
Why is the consumer indifferent between purchasing the second unit of good 1 and first unit of good 2?
Because these ratios are both equal to 9 utils, the consumer is indifferent between purchasing the second unit of good 1 and first unit of good 2, so she purchases both. She can afford to do so because the second unit of good 1 costs $2 and the first unit of good 2 costs $1, for a total of $3.
What is marginal utility?
Here, marginal utility is measured in fictional units called utils, which serve to quantify the consumer's additional utility or satisfaction from consuming different quantities of goods 1 and 2. The larger the number of utils, the greater is the consumer's marginal utility from consuming that unit of the good.
What is the condition of marginal utility per dollar spent on good 1?
This condition states that the marginal utility per dollar spent on good 1 must equal the marginal utility per dollar spent on good 2. If, for example, the marginal utility per dollar spent on good 1 were higher than the marginal utility per dollar spent on good 2, then it would make sense for the consumer to purchase more ...
Why do consumers purchase quantities of goods 1 and 2?
The consumer will purchase quantities of goods 1 and 2 so as to completely exhaust the budget for such purchases. The actual quantities purchased of each good are determined by the condition for consumer equilibrium, which is. This condition states that the marginal utility per dollar spent on good 1 must equal the marginal utility per dollar spent ...
What is the equation for equilibrium of consumer?
Such a point at which a consumer would attain equilibrium from the consumption of commodity ‘X’ would be expressed as MUx = Px
What is consumer equilibrium?
Consumer equilibrium is a point at which a consumer’s derived utility from a commodity is at its maximum, given a fixed level of income and price of that commodity. A rational consumer would not deviate from this point. 2.
What is the marginal utility of two or more commodities?
In the case of two or more commodities, the marginal utility derived from one commodity in proportion to its price should be equal to the marginal utility derived from a second commodity in proportion to its price.
How do consumers derive utility?
Consumers derive utility from each commodity they consume. This utility is dependent on the price of a product. The point at which the marginal utility (MU) of a product equals its price (P) is where consumer satisfaction maximises. It is expressed as MU = P. If the marginal utility of a product is higher than the price a consumer would continue to purchase additional units and vice versa until MU equals the fixed price level.
What happens when a MU curve intersects the price level when moving downwards?
If an MU curve intersects the price level when moving downwards, a consumer will derive negative utility from any additional consumption beyond that point.
What happens when a MU curve meets the price level?
If an MU curve meets the price level when moving upwards, a consumer has the scope to derive more utility from additional consumption of a commodity. Therefore, a rational consumer would continue purchasing more.
When would a rational consumer stop at 4 units?
A rational consumer would stop at 4 units when MU = P to maximise his/her utility.
What is the equilibrium point where the consumer gets the maximum amount of satisfaction?
As IC 3 lies outside the budget line, the consumer cannot climb up to the higher indifference curve. In other words, this curve is not attainable. Therefore, point E is the equilibrium point where the consumer gets the maximum amount of satisfaction by purchasing OX 1 of X and OY 1 of Y.
What is the necessary condition for equilibrium?
So the necessary condition for equilibrium is fulfilled. Sufficient condition requires that the indifference curve must be convex to the origin at the point of tangency. Since these two conditions are fulfilled at point E, the consumer is in equilibrium at that point. This is called ‘interior solution’ where a consumer buys both the goods.
Where is the optimum point of the indifference curve?
Anyway, the optimum point is reached at E where the indifference curve is tangential to the budget line.
Is our consumer in equilibrium at point E?
Our consumer is in equilibrium at point E since MRS XY = P X /P Y.
When is a consumer in equilibrium?
A consumer is in equilibrium when given his tastes, and price of the two fig 15 goods, he spends a given money income on the purchase of two goods in such a way as to get the maximum satisfaction, According to Koulsayiannis, “The consumer is in equilibrium when he maximises his utility, given his income and the market prices.”.
How to find equilibrium at any point on an indifference curve?
Thus for equilibrium to be stable at any point on an indifference curve, the marginal rate of substitution between any two goods must be diminishing and be equal to their price ratio i.e. MRS’ = Px/P y Therefore, the indifference curve must be convex to the origin at the point of tangency with the budget line.
What is the budget equation?
This budget equation is the equation of the line connecting the points Q and P, where Q = I/P x and P = I/P y Thus PQ is the budget line.
Where is the corner solution of the indifference curve?
The consumer will thus be in equilibrium at the corner point P of the indifference curve and the budget line PQ and consume only OP quantity of good Y and none of good X. If the consumer wishes to consume only good X, the corner solution will be at point Q on the indifference curve I 3.
What happens if the budget line PQ is steeper than the curve I 1?
On the other hand, if the budget line PQ is steeper than the curve I 1, as shown in panel (B), the equilibrium will be at the P corner and the consumer buys OP of good Y and none of X.
Where is the equilibrium in a straight line indifference curve?
In the case of a straight line indifference curve, if the budget line is relatively less steep than the indifference curve, the equilibrium will be in the corner where the I 1 , curve meets point О of the budget line PQ and the consumer will buy OQ and the consumer will buy OQ of good X and none of Y, as shown in Figure 18 (A).
What is the point of tangency between the budget line and a convex indifference curve?
We have seen above that the point of tangency between the budget line and a convex indifference curve leads to consumer’s equilibrium when he buys some units of both the commodities. This is called the interior solution, as at point 5 in Figure 17 which lies in the interior of the commodity space.
What is consumer equilibrium?
In other words, the consumer’s equilibrium means the combination of commodities that maximizes utility, given the budget constraint. To obtain consumer’s equilibrium graphically, you just need to superimpose the budget line on the consumer’s indifference map.
What is the marginal utility per dollar rule for consumer's equilibrium?
A small algebraic manipulation in the above equation gives us MU x /P x = MU y /P y , which is the marginal utility per dollar rule for consumer’s equilibrium. Thus, all the conditions for consumer’s equilibrium are fulfilled. The combination (X 0 Y 0) is an optimal choice (point E) for the consumer.
What is the consumer under consideration?
The consumer under consideration is a rational human being. This means that the consumer always tries to maximize his satisfaction with limited resources.
What is the goal of a consumer?
The goal of a consumer is to get maximum satisfaction from the commodities he purchases. At the same time, the consumer possesses limited resources. Hence, he is trying to maximize his satisfaction by allocating the available resources (money income) among various goods and services rationally. This is the main theme of the theory of consumer behavior. Further, you could ascertain that a consumer is in equilibrium when he obtains maximum satisfaction from his expenditure on the commodities given the limited resources. You can analyze consumer’s equilibrium through the technique of indifference curve and budget line.
Why does the budget line shift outward?
An outward parallel shift in the budget line occurs because of an increase in consumer’s money income provided that the prices of commodities X and Y remain unchanged (it means constant slope - P x /P y ). Likewise, a reduction in consumer’s money income creates a parallel inward shift in the budget line.
When is a consumer in equilibrium?
A consumer will be in equilibrium when he/she spends his/her given income on the purchase of different commodities so as to maximise his or her Total Utility.
What is the ordinal approach to consumer equilibrium?
The Ordinal Approach to Consumer Equilibrium asserts that the consumer is said to have attained equilibrium when he maximizes his total utility (satisfaction) for the given level of his income and the existing prices of goods and services. The ordinal approach defines two conditions of consumer equilibrium: Necessary or First Order Condition and Supplementary or Second Order Condition.
What is the effect of a change in the price of a good on the quantity of the good consumed?
The effect of a change in the price of a good on the quantity of the good consumed is the price effect .
How to get the most out of a budget?
To get the most out of their budget, a consumer will try to reach the highest indifference curve- in other words - consume a combination of the two goods that gives the consumer the most happiness (welfare , utility).
When the indifference curves are curved (convex) towards the origin, what happens?
When the indifference curves are curved (convex) towards the origin, then notice the following: take two consumption bundles A and B on the same indifference curve, and take a consumption bundle C that lies on a straight line between A and B. Because of the curvature of the indifference curve, C will lie above the curve, hence C ≻ A, B.
What is marginal utility?
The marginal utility of a good x is how much utility you get from a (tiny) unit of x, given your current quantity of not only x but all other goods. This concept is only well-defined if your utility function is sufficiently smooth.
How does the consumer reach equilibrium?
In one commodity model, the consumer equilibrium is determined when he consumes a single commodity while in the multiple commodity model, the consumer equilibrium is determined when he consumes two or more commodities.
What is the consumer equilibrium model?
Consumer’s Equilibrium – Multiple Commodity Model: The single commodity model is based on the unrealistic assumption that the consumer consumes a single commodity. But, however, in real life, the consumer consumes a large number of goods and services. This model talks about how the consumer consuming multiple commodities reaches his equilibrium.It ...
What is the theory of consumption?
Hence, the theory of consumption is based on the notion that consumer aims at maximising his utility for the amount of money spend on the goods and services. And the consumer reaches his equilibrium when he derives the maximum satisfaction from his consumption
What is the Cardinal approach to consumer equilibrium?
Definition: The Cardinal approach to Consumer Equilibrium posits that the consumer reaches his equilibrium when he derives the maximum satisfaction for given resources (money) and other conditions. A consumer is said to be highly satisfied when he allocates his expenditure in such a way that the last unit of money spent on each commodity yields ...
What is the law of equi-marginal utility?
The consumer will allocate his expenditure in accordance with the MU of the commodities. He will continue to switch his expenditure from one commodity to another until he reaches a stage where last penny spent on each commodity yields the same utility. This is called as the Law of Equi-Marginal Utility.
