[Commerce Class Notes] on Consumer Equilibrium Utility Analysis Pdf for Exam

The state of being balanced that is obtained by an end-user of the products which refers to the number of goods and services which the consumers can buy, given their level of income and the prevailing cost prices is called the Consumer’s Equilibrium. Consumer Equilibrium permits the customer to get maximum satisfaction that is possible from their income.

A rational consumer will purchase a commodity to a point where the price of the commodity is equal to the marginal utility that is obtained from the product. If the condition is not fulfilled then the consumer will either purchase more or less of the commodity.

When the objective is presumed to maximize total utility, the user makes certain choices about the number of goods and services. However, the consumer faces several constraints in maximizing total utility, out of which consumer’s income and if the most important, including the prices of the goods and services that the consumer wants to use. Moreover, these efforts to strengthen total utility are subject to relevant constraints, known as the consumer’s problem and the solution to it, which requires decisions about the consumption of goods and services by the user is further referred to as Consumer Equilibrium.

 

Consumer Equilibrium Utility Analysis

When a consumer is purchasing a specific commodity, and then he stops buying that particular commodity as the price and the utility have been equated.

At this point, the total utility is maximum at this level. The consumer is said to be in equilibrium at this point because he is getting maximum satisfaction derived from the commodity and he will buy neither more nor less of the commodity. That means the consumer reached his level of satiety.

While, if there is a change in the price then it will lead to a change in the quantity demanded.

 

Equilibrium with One Commodity

A consumer or a user buying just a single commodity will be at equilibrium when he gets maximum satisfaction after buying a certain quantity of the thing. However, the number of consumption units of any commodity by a consumer relies on two factors, that is the marginal utility or the expected utility from each successive unit and the price of the commodity.

In order to decide the point of equilibrium, the user compares the cost or price of the commodity with its benefit or utility. Therefore, when the marginal utility is and the price paid for the commodity is equal, the rational consumer will be at equilibrium. However, keeping this in mind, both the price and marginal utility should be in the same units, so that they can be effectively compared.

 

Equilibrium with More than One Commodity

Agreeing with the Marshallian utility analysis, when the expenditure of a consumer has been completely adjusted, which means, when the marginal utility of the consumer in each direction of his purchases is quite the same, then this is called Consumer’s Equilibrium. In this case, he has no desire to buy any more of one commodity or any less of another commodity.

With the set market prices, the consumers too want their income, which the consumer is said to be in equilibrium when the marginal utilities are being equalized and so the maximum satisfaction is obtained. After this, there will be no inducement to revise the scheme of this expenditure. The consumer will have to continue to buy the same commodities with the same quantities and until and unless either of the income or his wants or the prices change. Adjustment of these wants to one another and to their own environments is a sign of Consumer’s Equilibrium. For a consumer in order to be in equilibrium with respect to all the goods that are bought, this is the marginal significance of all goods in terms of the value of money which is to be equal with their money prices.

To derive the maximum satisfaction from the amount of money that a consumer has, he will be required to apportion his expenditure with that of the marginal utilities of the goods purchased which will be in proportion to their prices.

Thus, a consumer will be in equilibrium when,

M.U. of X /price of X = M.U. of Y / price of Y/ M.U. of Z / price of Z = k

 

()

 

Conditions of Consumer Equilibrium

A consumer is in equilibrium with his tastes, and the price of the two goods, in which he spends a given money income on the purchase of two goods in a way as to get the main satisfaction. According to Koulsayiannis, “The consumer is in equilibrium when he maximizes his utility, given his income and the market prices.”

Consumer Equilibrium in a Single Commodity Case

• The purchase should be restricted only to a single commodity.

• The price of the commodity is the price which exists in the market. The consumer will only determine the quantity to buy at the given price.

• The consumer is only a rational human being and, so, the goal of the consumer is to maximize the consumer’s surplus which only means that the surplus of this utility which he incurs over the expenditure on the good at the point of the commodity’s purchase.

• There is no problem with the consumer’s expenditure, i.e., he has only sufficient money to buy whatever quantity he decides to buy to achieve his own goal.

Consumer Equilibrium Formula

The formula for Consumer’s Equilibrium is as follows:

Consumer’s Surplus = total utility obtained – total expenditure

(at the Consumer’s Equilibrium point)

[= Total Utility-Pricetimes Quantity Purchased]

[= Total Utility-Marginal Quantitytimes Quantity Purchased]

 

Importance of Consumer Equilibrium

The state of balance that is obtained by an end-user of products refers to the number of goods and services they can buy, given their existing level of income and the prevailing level of cost prices. Consumer Equilibrium denotes the satisfaction which is attained by a customer which signifies his most satisfaction possible from their income.

Disadvantages of Utility Analysis

It is assumed in the utility analysis that it can be expressed in the exact unit or it is cardinally measurable. However, when it comes to utility, it is just a state of mind or what our mind feels and there is no standard measure to know what a person or consumer goes through or feels. So, it comes to a conclusion that utility is immeasurable and cannot be in terms of figures. This is one of the worst limitations of utility analysis.