CONSUMER'S
EQUILIBRIUM- PRICE EFFECT-

INCOME EFFECT
Presentation title 2

CONSUMER’S EQUILIBRIUM

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.
CONDITION OF CONSUMER
EQUILIBRIUM IN CASE OF
SINGLE COMMODITY
The consumer will be in the state of equilibrium
when the following condition is fulfilled:
 
The marginal utility of commodity X in terms of
rupees is equal to the price of commodity X in
rupees. [MUx (in ₹) = Px (in ₹)]
 Or
 Mux (in utils) = Px (in ₹) or MU of Commodity X (in
utils) = Px (in
₹)
 MUm (in utils) MU of Money (₹)(in utils)
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in the given example, the level of consumer’s
equilibrium is 3 units.
 
Where,
MU of ice cream in rupees = Price of ice cream in
rupees, i.e., ₹30
•Before this level, e., at the first and the second level,
MU > Price, i.e., benefit is more than cost. So, the
consumer increases the consumption to attain
equilibrium.
•After this level, i.e., at the fourth and the fifth level,
MU < Price, e., benefit is less than cost. So, the
consumer cuts or decreases the consumption to be in
the state of equilibrium. Only at the level of 3 units,
the condition of consumer’s equilibrium is fulfilled.
A consumer consumes the quantity at which MUx =
Px to be in the state of equilibrium.
Presentation title 7

INCOME EFFECT ON CONSUMER

EQUILIBRIUM
Income effect on consumer’s equilibrium can be defined as the effect caused by
changes in consumer’s income on his/her purchases while the prices of commodities
remain unchanged.
Point E is the original point of consumer’s equilibrium. At
point E, the indifference curve IC1 is tangent to the budget
line MN. In case the consumer’s income increases, the
budget line would shift from MN to M1N1 and then to
M2N2.
As a result, the point of equilibrium shifts from E to E1 and
then to E2. The ICC line on the graph represents the Income
Consumption Curve. The ICC can be obtained by joining all
the points of consumer’s equilibrium E, E1 and E2.
PRICE EFFECT ON CONSUMER
EQUILIBRIUM
he price effect is the change in the price of any one of the
commodities due to which the quantity of commodities or

services purchased changes.

Assume that the consumer purchases two commodities, X and Y. The price of
commodity X decreases while the price of commodity Y and consumer’s money
income remains constant.
the drop in the price of commodity X is denoted by the corresponding shifts of
budget line from AB1 to AB2, AB2 to AB3 and AB3 to AB4. C1, C2, C3, and C4
represent a shift in consumer’s equilibrium. As the price of commodity X
decreases, the consumer’s real income increases.
As a result, the consumer is able to purchase more units of both commodities X
and Y. The curve PCC represents the Price Consumption Curve, which can be
obtained by joining all equilibrium points C1, C2, C3, and C4.
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