Conditions of Consumer Equilibrium

What is Consumer Equilibrium? 

The state of maximum satisfaction is called consumer equilibrium. The state of balance obtained by the consumer of a product to a different number of goods and services they consume, with their current income level and the product’s cost. Consumer equilibrium permits the maximum limit of possible satisfaction consumers achieves at the current income. In more simple words, consumer equilibrium is the term used to describe the case where the consumer spends their income on purchasing goods or services to get maximum satisfaction and has no desire or need to change the consumption, given the prices of commodities are acceptable. 

What is the Importance of Consumer Equilibrium? 

A commodity will only be purchased by the consumer till the commodity’s cost is equal to the marginal utility gained from the commodity. If the condition of maximum satisfaction is not there, then the purchase of the commodity will decrease, and consumers will buy less. Consumer equilibrium enables the consumer to maximise their utility from consuming one or more commodities. It also helps consumers organise the combination of two or more commodities based on consumer taste and preference for maximum utility. The consumer equilibrium formula is MUx/Px=MUY/PY=MU of the last cost spent on each commodity.                                   

Conditions of Consumer’s Equilibrium 

The state of equilibrium for consumers is possible under the following conditions:  The (MU)marginal utility of commodity X cost of product in terms of cost is equal to the cost of the commodity X in cost (MUx = Px).   If the consumer purchases more of the commodity, then the MU or marginal utility will fall, and then the situation will arise where the price paid will increase from the MU or marginal utility. To avoid dissatisfaction with negative utility, the consumer will reduce the consumption, and the MU will keep increasing until the price is equal to the MU or marginal utility. Whereas, if the MU or marginal utility exceeds the price paid, the consumer will gain additional satisfaction from the commodity he consumed before. This will make the consumer desire to buy so many units of a single or one commodity, leading to the falling of MU, bringing it equal to the price. Therefore, after buying some quantities of goods and services, they will reach a point where P=MU.  

Assumption and Conditions of Consumer’s Equilibrium in case of a Single Commodity 

In the case of single commodity consumption, the purchase is limited to an individual commodity; the commodity’s cost is already provided in the market, so the consumer will decide the unit they need to purchase at that provided cost. The law of diminishing Utility explains the conditions of consumer’s equilibrium; the law of diminishing utility says that as the consumer consumes more units of the commodity, the MU received from each unit goes on diminishing. However, the commodity’s unit needed to be consumed by the consumer is decided by two factors:  the cost for each unit which the consumer pays and the utility they get. While buying a unit of commodity, a consumer compares the cost of the given commodity with its unity. 

Assumptions and Conditions of Consumer’s Equilibrium in case of Two or More Commodities 

In the case of consumption of two or more commodities, the consumer purchases only two commodities, A and B. Given the cost of both products are already present in the market, the consumer cannot influence or change the price of both goods; the consumer only has the option of how much the consumer can buy both the commodities. The law of diminishing marginal commodity is not applicable in the case of the two commodities.  

Conclusion

The state of maximum satisfaction is called consumer equilibrium. It is the state of balance obtained by the consumer of a product related to goods and services they consume, with their current income level and the product’s cost. It also helps consumers organise the combination of two or more commodities based on consumer taste and preference for maximum utility. The consumer equilibrium formula is MUx/Px=MUY/PY=MU of the last cost spent on each commodity. The MU or marginal utility of commodity X cost of product in terms of cost s is equal to the cost of the commodity X in cost s (MUx = Px).   If the consumer purchases more of the commodity, then the MU or marginal utility will fall. Then the situation will arise where the price paid will exceed the MU or marginal utility.