Posted by Anjali Kaur on Jul 01, 2020
Consumer equilibrium in case of utility analysis

What are the conditions of consumer’s equilibrium under utility analysis?

This is an interesting topic for all economics students to learn. Although this theory does not apply practically, it forms the basis for consumer behavior. So, today we will learn the consumer’s equilibrium under utility analysis with one and two goods condition. Let’s learn.

What is consumer equilibrium?

Consumer equilibrium refers to a situation where a consumer spends his given income on the purchase of commodity in such a way that he gets the maximum satisfaction.

The conditions of a consumer equilibrium using utility analysis or marginal utility analysis

  1. In the case of a single commodity or one commodity: The following conditions should be met;
    1. MUx=Price; This condition means that the satisfaction derived from the consumption of a commodity ‘x’ should be equal to the price paid for ‘x’.
    2. MUx/Px=MUm; This condition means that the ratio of marginal utility of a commodity ‘x’, that is, the satisfaction derived from the consumption of a commodity, divided by the price paid for it should equate the marginal utility of money (m).
    3. MU of money should remain constant.
    4. The law of diminishing marginal utility must hold.
  2. In the case of two commodities: The following conditions should be met;
    1. MUx=MUy=Price; This condition is used when the price of both goods (x and y are two goods here) is the same.
    2. MUx/Px=MUy/Py=MUm; This condition is used when the price of both the goods is different.
    3. MU of money should remain constant.
    4. The law of diminishing marginal utility must hold.

You can refer this presentation for more clarity:

Theory of Consumer Behaviour Class 12 Economics from Anjali Kaur Suri

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