CONSUMER’S

EQUILIBRIUM : UTILITY
ANALYSIS
CONSUMER’S EQUILIBRIUM
• It refers to the situation in which a consumer gets maximum
satisfaction from the purchase of a commodity with given income.

• Consumer will attain its equilibrium at the point where MU of a

product divided by the MU of a rupee is equal to the price of the
commodity.
Conditions of consumer’s equilibrium using
MU Analysis
• The conditions of consumer’s equilibrium using MU approach is
studied under two cases.
In case of single commodity
• In case of single commodity, consumer attains equilibrium, when:

• i) Mux/Px= Mum
• Or
• MUx/MUm= Px
• It implies that in state of equilibrium, ratio of MUx and MUm is equal
to the price of commodity.
• Ii) Mux= Px
• It implies that in state of equilibrium, MU derived form the
consumption of a commodity is equal to its price.
• The concept can be explained with the help of the schedule.
• The consumer will consume 4 apples because at that point MU and
Price are equal.
• The following diagram will help in a better understanding of the
schedule.
Adjustment Mechanisms
• If MUx > Px, the consumer will increase the consumption of good X.
When consumption increases Marginal Utility will fall and will become
equal to Price.

• If MUX < Px, the consumer will reduce the consumption of X. When
consumption falls, marginal utility will increase. It will become equal
to Price.
Note:
• Marginal Utility keeps on falling as consumption increases.

• It is due to the operation of the Law of Diminishing Marginal Utility.

In case of two commodities
• In case of two commodities , consumer attains equilibrium when:
• Mux/Px= Muy/Py= Mum
• It implies that in state of equilibrium, utility per rupee obtained by the
consumer from Good X or Good Y should be equal to marginal utility
of money.

• Mux/Px= Muy/Py
• It implies that in state of equilibrium , utility per rupee from good X
must be equal to utility per rupee from good Y, when Mum=1
• The above condition can also be written as:
• Mux/Muy= Px /Py
• It implies that in state of equilibrium , ratio of marginal utilities of two
commodities is equal to the ratio of their prices
 • Mux= Muy, Mum= 1- and Px=Py
• Assumption (Px=Py= Rs 1 per unit)
Units of X Mux Px Mux in Units of Y MuY PY MuY in
terms of terms of
Rs(Mux/Px) Rs(MuY/PY)
1 100 10 10 1 24 2 12

2 80 10 8 2 22 2 11

3 60 10 6 3 20 2 10

4 40 10 4 4 18 2 9

5 20 10 2 5 16 2 8
• In the above schedule, Mux/Px= Muy/Py, when consumer is
consuming 1 unit of good X and 3 units of good Y and also, when he is
consuming 2 units of good X and 5 units of good Y.
• Now let us assume that his money income is rs 30.
• So, for the first combination, he pays 1 x 10 + 3 x 2 =16, which is less
than his money income , therefore he is not in equilibrium.
• For the 2nd combination, he pays 2x 10 + 5x 2= rs 30, which is equal to
his money income. Also at this level, TU is maximum. Therefore,
equilibrium is struck when he consumes 2 units of X and 5 units of Y.
• Equilibrium equation for n number of commodities:
• MU1/P1=Mu2/P2= MU3/P3=……..=Munth/Pnth= MUm