Consumer Equilibrium - Two Goods

Let us suppose that the consumer consumes two goods X and Y

Condition of consumer Equilibrium incase of Good X is
The ratio of Marginal Utility of good X to its Price should be equal to the Marginal Utility of money
1. Mux / Mum = Px
2. Law of DMU operates
Similarly , we can say that
Condition of consumer Equilibrium incase of Good Y is
1. Mu y / Mum = P y
2. Law of DMU operates
Accordingly, Consumer Equilibrium incase of two goods will be
1. Mux / Px = Mu y / P y = MU m
2. Law of DMU
In other words we can say that, Law of Equi Marginal Utility states that–
The ratio of the marginal utility to its price of one commodity is equal to the
ratio of the marginal utility to the price of the second commodity and also
equal to the marginal utility of money.
 Consumer Equilibrium - Two Goods

What happens when Mux / Px > Mu y / P y , Is the consumer in equilibrium

v When Mux / Px > Mu y / P y

v This implies that the consumer is getting more satisfaction from the consumption of good X
than from the consumption of good Y .
v In order to attain equilibrium , he should , therefore consume more of good X and less of
good Y.
v When he consumes more of good X due to the operation of the law of DMU , MU from
good X will fall .
v When he consumes less of good Y due to the operation of the law of DMU , MU from good
Y will rise.
v This will keep on happening till the the ratio of the marginal utility to its price of
commodity X is equal to the ratio of the marginal utility to the price of the commodity Y
and also equal to the marginal utility of money.
 Consumer Equilibrium - Two Goods

What happens when Mux / Px < Mu y / P y , Is the consumer in equilibrium

v When Mux / Px > Mu y / P y

v This implies that the consumer is getting more satisfaction from the consumption of good Y
than from the consumption of good X.
v In order to attain equilibrium , he should , therefore consume more of good Y and less of
good X.
v When he consumes more of good Y due to the operation of the law of DMU , MU from
good Y will fall .
v When he consumes less of good X due to the operation of the law of DMU , MU from good
X will rise.
v This will keep on happening till the the ratio of the marginal utility to its price of
commodity X is equal to the ratio of the marginal utility to the price of the commodity Y
and also equal to the marginal utility of money.