Consumer Equilibrium

Law of Equi-Marginal Utility and consumer equilibrium :- Law of equi-marginal utility

states that the consumer strikes his equilibrium when the last rupee ( spent by him )
gives him equal marginal utility whether he spend it on goods - X or goods – Y.
Consumer's equilibrium refers to a situation where in a consumer gets maximum
satisfaction out of his given income and he has no tendency to make any change in his
exiting expenditure.
In other words - The consumer is in equilibrium when, given his income and market prices,
he plans his expenditure ( on different goods and services ) in such a manner that he
maximises his total satisfaction.

 It has two different situations -

1. When only one commodity is consumed.
2. When two or more commodities are consumed.

1. When only one commodity is consumed :- Purchase of a

commodity by a consumer depends on three factors -
A. Price of the commodity
B. Marginal ( and total ) Utility of the commodity
C. Marginal Utility of money.
If a consumer spend entire income on single commodity then he
get maximum satisfaction when marginal utility of X
commodity is equal to price of the X commodity. MUx = Px
If the marginal utility of commodity X is more than the price of X
( MUx > Px ), then consumer will buy more quantity of X and
increase his welfare. On the contrary if marginal utility is
less than the price of X ( MUx < Px ) then the consumer will
buy less quantity of X to maximize his welfare. Thus to
maximize his satisfaction, a consumer fulfills the condition.
MUX = Px

2. When two or more commodities are consumed :-

Units Of Commodity MUX ( Utils ) MUY ( Utils )
1 17 26
Assumption :
2 15 23
3 12 19
PX = PY
4 10 16
= Rs. 1 Per Unit
5 7 13
6 5 10
Equilibrium condition with respect to consumption of X and Y is that -

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 One Commodity Case
1. Rupee worth of marginal utility actually
received by the consumer is equal to
marginal utility of money as specified by
the consumer himself.
Two Commodity Case
1. Rupee worth of marginal utility
should be the same across Good –
X and Good – Y, and equal to
marginal utility of money.

It simply means that the rupee worth of MU
actually received is exactly equal to the
rupee worth of satisfaction as desired by
the consumer.
2. Marginal utility of money ( MUm ) remains
constant. As, it is a measuring rod of rupee
worth of satisfaction.
3. Law of diminishing marginal utility holds
good. In case MU tends to rise,
consumption of a commodity will never
reach an end. Equilibrium will never be
struck.
This simply means that the rupee worth
of MU derived from either
commodity is exactly equal to the
rupee worth of satisfaction as
desired by the consumer.
2. Marginal utility of money ( MUm )
remains constant.
3. Law of diminishing marginal
utility holds good.

Optimum choice of the consumer ( Rational

Consumer ) / Equilibrium of the consumer /
Consumer equilibrium :- The consumer
equilibrium or optimum choice of the
consumer are depends on indifference curve
and budget line. The consumer will be in a
state of equilibrium at the point where he
gets maximum satisfaction and the bundles
on the indifference curve above this are
beyond the consumer's capacity, and The
bundles lying on the indifference curve
below this are inferior to the consumer, so

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 in indifference curve analysis, the following conditions must be satisfied for the
consumer equilibrium –
1. The point of consumer's equilibrium is the point where the budget line touch the
indifference curve and is the point of maximum satisfaction.
2. The point of consumer's equilibrium is the point at which the marginal rate of
substitution is equal to the ratio of prices. This is a necessary condition of consumer's


equilibrium. MRSxy =


3. At the point of equilibrium, the marginal rate of substitution must have been decline (
decreasing or diminishing ) i.e. the shape of the indifference curve should be convex to
the orgin.
Note1:- The slope of the indifference curve and the budget line should be the same at the
equilibrium point.

A. Cardinal Approach :-
1. One / Single Commodity Case :-  = 
 
Or =  Or = 
 

2. Two or More than Two Commodity Case :-

 
 

Condition 1 :- = Or = = ⋯



 

Or = = 


Condition 2 :-
Total Income / Expenditure = Expenditure of X Commodity + Expenditure of Y
Commodity

B. Ordinal Approach :-
1. The point of consumer's equilibrium is the point where the budget line touch the
indifference curve and is the point of maximum satisfaction.
2. The point of consumer's equilibrium is the point at which the marginal rate of
substitution is equal to the ratio of prices. This is a necessary condition of

consumer's equilibrium. MRSxy =

3. At the point of equilibrium, the marginal rate of substitution must have been
decline ( decreasing or diminishing ) i.e. the shape of the indifference curve should
be convex to the orgin.
Note :- The slope of the indifference curve and the budget line should be the same at the
equilibrium point.

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Ques. Suppose when price of X commodity is Rs. 5 than find out
consumer equilibrium ?
Units MUx
1 16
2 10
3 8
4 6
5 5
6 4

Ques. Suppose when price of X commodity is Rs. 4 and marginal utility of

money is 2 utils than find out consumer equilibrium ?
Units MUx
1 20
2 18
3 16
4 8
5 0
6 -5

Ques. Suppose when price of X commodity is Rs. 8 and marginal utility of

money is 3 utils than find out consumer equilibrium ?
Units MUx
1 32
2 28
3 24
4 20

Ques. Suppose that an commodity is sold Rs. 10 and marginal utility of 4th
units is 40 utils. If marginal utility of money is 4 utils so it is consumer
equilibrium or not ?

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Ques. Suppose price of X commodity is Rs. 5 and marginal utility of 7th
units is 25 utils. If marginal utility of money is 5 utils so it is consumer
equilibrium or not ?

Ques. Suppose that an commodity is sold Rs. 15 and total utility of 5th
units is 125 utils and total utility of 6th units is 140 utils. If marginal
utility of money is 3 utils so it is consumer equilibrium or not ?

Ques. Suppose when price of X commodity is Rs. 6 and marginal utility of

money is 1 utils than find out consumer equilibrium ?
Units TUx
1 10
2 18
3 25
4 31
5 34
6 34

Ques. Suppose when marginal utility of money is 1 utils than find out
consumer equilibrium ?
Units Price of X Commodity TUx
1 7 110
2 7 119
3 7 127
4 7 134
5 7 140
6 7 145

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Ques. Suppose when price of X commodity is Rs. 2 and marginal utility of
money is 8 utils than find out consumer equilibrium ?
Units MUx
1 30
2 24
3 20
4 16
5 14
6 8
7 2

Ques. Suppose when price of X commodity is Rs. 4 and marginal utility of

money is 4 utils than find out consumer equilibrium ?
Units MUx
1 20
2 18
3 16
4 8
5 0
6 -5

Ques. Suppose when price of X commodity is Rs. 4 and marginal utility of

money is 4 utils than find out consumer equilibrium ?
Units MUx
1 20
2 18
3 16
4 8
5 0
6 -5

Ques. Suppose when Income of the consumer Rs. 5 and price of X and Y
commodity is Rs. 1 than find out consumer equilibrium ?

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Units MUx MUy
1 20 16
2 14 12
3 12 8
4 7 5
5 5 3

Ques. Suppose when Income of the consumer Rs. 10 and price of X and Y
commodity is Rs. 1 than find out consumer equilibrium ?
Units MUx MUy
1 17 26
2 15 23
3 12 19
4 10 16
5 7 13
6 5 10

Ques. Suppose when Income of the consumer Rs. 88 and price of X and Y
commodity is Rs. 8 than find out consumer equilibrium ?
Units MUx MUy
1 88 40
2 72 36
3 64 24
4 56 20
5 48 16
6 40 12
7 32 8
8 24 4
9 16 0
10 8 -4

Ques. Suppose when Income of the consumer Rs. 34 and price of X and Y
commodity is Rs. 2 than find out consumer equilibrium ?

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Units MUx MUy
1 88 40
2 72 36
3 64 24
4 56 20
5 48 16
6 40 12
7 32 8
8 24 4
9 16 0
10 8 -4

Ques. Suppose when Income of the consumer Rs. 22 and price of X

commodity is Rs. 4 and price of Y commodity is Rs. 2 than find out
consumer equilibrium ?
Units MUx MUy
1 80 40
2 72 38
3 64 36
4 56 34
5 48 32
6 40 30
7 32 28

Ques. Suppose a consumer has Rs. 24 with him to spend on two goods X
and Y. Further, suppose price of each units of X good is Rs. 2 and that of
Y goods is Rs. 3 than find out consumer equilibrium ?
Units MUx MUy
1 20 24
2 18 21
3 16 18
4 14 15
5 12 12
6 10 9

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Ques. Suppose total money income of a consumer is Rs. 5 which he wants
to spend on two goods X and Y. Both these goods priced is Rs. 1 than find
out consumer equilibrium ?
Units MUx MUy
1 20 24
2 18 21
3 16 18
4 14 15
5 12 12
6 10 9

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