by Smriti Chand Economics
Read this article to learn about the consumer’s equilibrium
in case of single and two commodities!
The term ‘equilibrium’ is frequently used in economic analysis.
Equilibrium means a state of rest or a position of no change. It refers to a position of rest, which provides the maximum benefit or gain under a given situation. A consumer is said to be in equilibrium, when he does not intend to change his level of consumption, i.e., when he derives maximum satisfaction.

Image Courtesy : harpercollege.edu/mhealy/ecogif/s%26d/fig17-6.5.gif
Consumer’s Equilibrium refers to the situation when a consumer is having maximum satisfaction with limited income and has no tendency to change his way of existing expenditure. The consumer has to pay a price for each unit of the commodity. So, he cannot buy or consume unlimited quantity. As per the Law of DMU, utility derived from each successive unit goes on decreasing. At the same time, his income also decreases with purchase of more and more units of a commodity.
So, a rational consumer aims to balance his expenditure in such a manner, so that he gets maximum satisfaction with minimum expenditure. When he does so, he is said to be in equilibrium. After reaching the point of equilibrium, there is no further incentive to make any change in the quantity of the commodity purchased.
It is assumed that the consumer knows the different goods on which his income can be spent and the utility that he is likely to get out of such consumption. It means that the consumer has perfect knowledge of the various choices available to him.

Consumer’s equilibrium can be discussed under two
different situations:
1. Consumer spends his entire income on a Single Commodity
2. Consumer spends his entire income on Two Commodities
The Law of DMU can be used to explain consumer’s equilibrium in case of a single commodity. Therefore, all the assumptions of Law of DMU are taken as assumptions of consumer’s equilibrium in case of single commodity.
A consumer purchasing a single commodity will be at equilibrium, when he is buying such a quantity of that commodity, which gives him maximum satisfaction. The number of units to be consumed of the given commodity by a consumer depends on 2 factors:
1. Price of the given commodity;
2. Expected utility (Marginal utility) from each successive unit.

To determine the equilibrium point, consumer compares the price (or cost) of the given commodity with its utility (satisfaction or benefit).
Being a rational consumer, he will be at equilibrium when marginal utility is equal to price paid for the commodity. We know, marginal utility is expressed in utils and price is expressed in terms of money
However, marginal utility and price can be effectively compared only when both are stated in the same units. Therefore, marginal utility in utils is expressed in terms of money.
Marginal Utility in terms of Money = Marginal Utility in utils/ Marginal
Utility of one rupee (MU
M
)
MU of one rupee is the extra utility obtained when an additional rupee is spent on other goods. As utility is a subjective concept and differs from person to person, it is assumed that a consumer himself defines the MU of one rupee, in terms of satisfaction from bundle of goods.
Equilibrium Condition:
Consumer in consumption of single commodity (say, x) will be at equilibrium when:

Marginal Utility (MU x
) is equal to Price (P x
) paid for the commodity; i.e. MU = Price i. If MU
X
> P x
, then consumer is not at equilibrium and he goes on buying because benefit is greater than cost. As he buys more, MU falls because of operation of the law of diminishing marginal utility. When
MU becomes equal to price, consumer gets the maximum benefits and is in equilibrium. ii. Similarly, when MU
X
< P x
, then also consumer is not at equilibrium as he will have to reduce consumption of commodity x to raise his total satisfaction till MU becomes equal to price.
Note:
In addition to condition of “MU = Price”, one more condition is needed to attain consumer’s equilibrium: “MU falls as consumption increases”.
However, this second condition is always implied because of operation of Law of DMU. So, a consumer in consumption of single commodity will be at equilibrium when MU = Price.
Let us now determine the consumer’s equilibrium if the consumer spends his entire income on single commodity. Suppose, the consumer wants to buy a good (say, x), which is priced at Rs. 10 per unit. Further

suppose that marginal utility derived from each successive unit (in utils and in is determined and is given in Table 2.3 (For sake of simplicity, it is assumed that 1 util = Rs. 1, i.e. MU
M
= Rs. 1).
Table 2.3: Consumer’s Equilibrium in case of Single
Commodity
Marginal utility in
Rs.
Units Price Marginal (MU
X
) 1 Difference of
X
(P x
)
(Rs.) utility
(utils) util =Rs.
1
MU
P x
X
and
Remarks
MU
X
>
1 10 20 20/1 = 20 20-10= 10 P x> so consumer will increase
2
3
10
10
16
10
16/1 = 16 16-10= 6
10/1 = 10 10-10= 0 the consumption
Consumer’s
Equilibrium

4 10 4
5 10 0
6 10 -6
4/1 = 4 4-10= -6
(MU
X
=P
X
)
MU
X
< P x
, so consumer will decrease the
0/1 = 0 0-10=-10
- 6/1 = -6 -6-10=-16 consumption
In Fig. 2.3, MU
X
curve slopes downwards, indicating that the marginal utility falls with successive consumption of commodity x due to operation of Law of DMU. Price (P x
) is a horizontal and straight price

line as price is fixed at Rs. 10 per unit. From the given schedule and diagram, it is clear that the consumer will be at equilibrium at point ‘E’, when he consumes 3 units of commodity x, because at point E, MU
X
=
P x i. He will not consume 4 units of x as MU of Rs. 4 is less than price paid of Rs. 10. ii. Similarly, he will not consume 2 units of x as MU of Rs. 16 is more than the price paid.
So, it can be concluded that a consumer in consumption of single commodity (say, x) will be at equilibrium when marginal utility from the commodity (MUJ is equal to price (PJ paid for the commodity.
For Practical Problems of ‘Consumer’s Equilibrium in case of Single
Commodity’, refer Examples 4 to 7 (Section 2.9) and 2 Unsolved
Problems given in the Exercise.
The Law of DMU applies in case of either one commodity or one use of a commodity. However, in real life, a consumer normally consumes

more than one commodity. In such a situation, ‘Law of Equi-Marginal
Utility’ helps in optimum allocation of his income.
Law of Equi-marginal utility is also known as:
(i) Law of Substitution;
(ii) Law of maximum satisfaction;
(iii) Gossen’s Second Law.
As law of Equi-marginal utility is based on Law of DMU, all assumptions of the latter also apply to the former. Let us now discuss equilibrium of consumer by taking two goods: ‘x’ and ‘y’. The same analysis can be extended for any number of goods.
In case of consumer equilibrium under single commodity, we assumed that the entire income was spent on a single commodity. Now, consumer wants to allocate his money income between the two goods to attain the equilibrium position.
According to the law of Equi-marginal utility, a consumer gets maximum satisfaction, when ratios of MU of two commodities and

their respective prices are equal and MU falls as consumption increases. It means, there are two necessary conditions to attain
Consumer’s Equilibrium in case of Two Commodities:
(i) Marginal Utility (MU) of last rupee spent on each
commodity is same: i. We know, a consumer in consumption of single commodity (say, x) is at equilibrium when MU x
/P x
=MU
M
(ii) Similarly, consumer consuming another commodity (say, y) will be at equilibrium when MU
Y
/P
Y
=MU
M
Equating 1 and 2, we get: MU
X
/P
X
= MU
Y
/P
Y
= MU
M
As marginal utility of money (MU
M
) is assumed to be constant, the above equilibrium condition can be restated as:
MU
X
= MU
Y
/P
Y
or MU
X
/MU
Y
= P
X
/P
Y
What happens when MU
X
/P
X
is Not Equal to MU
Y
/P
Y
(i) Suppose, MU
X
/ P
X
>MU
Y
/P
Y
. In this case, the consumer is getting more marginal utility per rupee in case of good X as compared to Y.
Therefore, he will buy more of X and less of Y. This will lead to fall in
MU
X
and rise in MU
Y
. The consumer will continue to buy more of X till
MU
X
/P
X
= MU
Y
/P
Y

(ii) When MU
X
/P
X
<MU
Y
/P
Y
, the consumer is getting more marginal utility per rupee in case of good Y as compared to X. Therefore, he will buy more of Y and less of X. This will lead fall in MU
Y
and rise in MU
X
.
The consumer will continue to buy more of Y till MU
X
/P
X
= MU
Y
/P
Y
.
It brings us to a conclusion that MU
X
/P
X
= MU
Y
/P
Y
is a necessary condition to attain Consumer’s Equilibrium.
(ii) MU falls as consumption increases:
The second condition needed to attain consumer’s equilibrium is that
MU of a commodity must fall as more of it is consumed. If MU does not fall as consumption increases, the consumer will end up buying only one good which is unrealistic and consumer will never reach the equilibrium position.
Finally, it can be concluded that a consumer in consumption of two commodities will be at equilibrium when he spends his limited income in such a way that the ratios of marginal utilities of two commodities and their respective prices are equal and MU falls as consumption increases.
Explanation with the help of an Example:

Let us now discuss the law of equi-marginal utility with the help of a numerical example. Suppose, total money income of the consumer is
Rs. 5, which he wishes to spend on two commodities: ‘x’ and ‘y’. Both these commodities are priced at Rs. 1 per unit. So, consumer can buy maximum 5 units of ‘x’ or 5 units of ‘y’. In Table 2.4, we have shown the marginal utility which the consumer derives from various units of ‘x’ and ‘y’.
Table 2.4: Consumer’s Equilibrium in case of Two
Commodities
Units
1
2
3
4
5
MU of commodity
‘x’
(in utils)
20
14
12
7
5
MU of commodity
‘y’
(in utils)
16
12
8
5
3

From Table 2.4, it is obvious that the consumer will spend the first rupee on commodity ‘x’, which will provide him utility of 20 utils. The second rupee will be spent on commodity ‘y’ to get utility of 16 utils. To reach the equilibrium, consumer should purchase that combination of both the goods, when:
(i) MU of last rupee spent on each commodity is same; and
(ii) MU falls as consumption increases.
It happens when consumer buys 3 units of ‘x’ and 2 units of ‘y’ because: i. MU from last rupee (i.e. 5 th rupee) spent on commodity y gives the same satisfaction of 12 utils as given by last rupee (i.e. 4 th rupee) spent on commodity x; and ii. MU of each commodity falls as consumption increases.
The total satisfaction of 74 utils will be obtained when consumer buys 3 units of ‘x’ and 2 units of ‘y’. It reflects the state of consumer’s equilibrium. If the consumer spends his income in any other order, total satisfaction will be less than 74 utils.

For Practical Problems of ‘Consumer’s Equilibrium in case of Two
Commodities’, refer Example 8 (Section 2.9) and 2 Unsolved Problems given in the Exercise.
Limitation of Utility Analysis:
In the utility analysis, it is assumed that utility is cardinally measurable, i.e., it can be expressed in exact unit. However, utility is a feeling of mind and there cannot be a standard measure of what a person feels. So, utility cannot be expressed in figures. There are other limitations too. But, their discussion is beyond the scope.
1.
The Concept of Utility: It’s Meaning, Total Utility and Marginal Utility |
Economics
2.
The Proportionality Rule or Consumer’s Equilibrium under Utility
Analysis | Managerial Economics
3.
Law of Demand: Important Facts, Reasons and Exceptions | Micro
Economics
4.
The Law of Diminishing Marginal Utility: Meaning, Limitation and
Importance | Economics

5.
Effect on Equilibrium Price and Equilibrium Quantity | Micro
Economics
6.
Consumer’s Equilibrium: Assumptions and Conditions | Economics
7.
General Equilibrium in Economics: Meaning, Assumptions, Working and Limitations
8.
5 Major Factors Affecting the Demand of a Product | Micro Economics
9.
Total Utility vs. Marginal Utility (explained with diagram)
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 SEMINAR PresentationConsumer Equilibrium under Indifference Curve Analysis BA Economics
Programme Muhammed Haneef T.P Askar Muhammed Younis Salim SAFI Institute of Advanced
Study, Vazhayoor
 Consumer Equilibrium under Indifference Curve AnalysisI. Introduction to Indifference curve analysisII. Assumptions to equilibrium of the consumerIII. Indifference Map and Budget Line of con sumerIV. Consumer’s Equilibrium or Maximization of SatisfactionV. First and Second order condition for consumer equilibrium.VI. Income Effect: Income consumption Curve a) ICC of Normal
Good b) ICC of Luxury Goods c) ICC of Inferior goodVII. Conclusion
 Consumer Equilibrium under Indifference Curve Analysis 1. Introduction to Indifference curve analysis
 Consumer Equilibrium under Indifference Curve Analysis1. Introduction to Indifference curve analysis
• Ordinal means- Can be compare with each other- 1St , 2nd , 3rd etc. • Ordinal Utility analysis -

Utility can compare but can not be measure. • Popularized by J.R. Hicks and R.G.D. Allen • Used the tool named Indifference Curve • Known as Indifference curve approach of utility analysis
 Consumer Equilibrium under Indifference Curve Analysis1. Introduction to Indifference curve analysis
Assumptions Indifference Curve Analysis a) Consumer is rational or Rationality b) Utility is ordinal c)
Consistence in choice If A > B, then never become B > A 4. Consumer’s Preference is Transitive: If
A > B and B > C, then A > C 5. Diminishing Marginal Substitution of goods: 6. Dependent Utility 7. A
Large bundle of goods preferred to small bundle
 Consumer Equilibrium under Indifference Curve Analysis II. Assumptions to explain equilibrium of the consumer
 Consumer Equilibrium under Indifference Curve AnalysisII. Assumptions to equilibrium of the consumerTo Explain the consumers equilibrium the following assumption is there1. The consumer has Indifference Map of good X and Good Y2. The consumer have a fixed money income which are spend on X and Y3. The Prices of good X –Px and good Y – Py are given4. Good are homogenous
 Consumer Equilibrium under Indifference Curve Analysis III. Indifference Map and Budget Line of consumer
 Consumer Equilibrium under Indifference Curve AnalysisIII. Indifference Map and Budget Line of consumer A graph showing a whole set of indifference curves is called an indifference map. An indifference map, in other words, is comprised of a set of indifference curves. Each successive curve further from the original curve indicates a higher level of total satisfaction.
 Consumer Equilibrium under Indifference Curve AnalysisIII. Indifference Map and Budget Line of consumer A budget line or price line represents the various combinations of two goods which can be purchased with a given money income and assumed prices of goods". Income (Y)= 60 Price of

Biscuit (Px) = 6 Price of Coffee(Py) = 12 Combination Biscuit Coffee A 10 0 B 8 1 C 6 2 D 4 3 E 2 4 F
0 5
 Consumer Equi librium under Indifference Curve Analysis IV. Consumer’s Equilibrium or
Maximization of Satisfaction
 Consumer Equilibrium under Indifference Curve AnalysisIV. Consumer’s Equilibrium or Maximization of Satisfaction "The term consumer’s equilibrium refers to the amount of goods and services which the consumer may buy in the market given his income and given prices of goods in the market, that give maximum satisfaction to consumer". The aim of the consumer is to get maximum satisfaction from his money income. Given the price line or budget line and the indifference map:

Consumer Equilibrium under Indifference Curve AnalysisIV. Consumer’s Equilibrium or Maximization of Satisfaction "The term consumer’s equilibrium refers to the amount of goods and services which the consumer may buy in the market given his income and given prices of goods in the market". The aim of the consumer is to get maximum satisfaction from his money income. Given the price line or budget line and the indifference map:
 Consumer Equilibrium under Indifference Curve AnalysisIV. Consumer’s Equilibrium or Maximization of Satisfaction "A consumer is said to be in equilibrium at a point where the price line is touching the highest attainable indifference curve from below"
 Consumer Equilibrium unde r Indifference Curve AnalysisIV. Consumer’s Equilibrium or Maximization of Satisfaction "A consumer is said to be in equilibrium at a point where the price line is touching the highest attainable indifference curve from below"
 Consumer Equilibrium under Indifference Curve AnalysisIV. First order and Second order condition for consumer Equilibrium

 Consumer Equilibrium under Indifference Curve AnalysisIV. First order and Second order condition for consumer Equilibrium Thus the consumer’s equilibrium under the indifference curve theory must meet the following two conditions: First order condition : A given price line should be tangent to an indifference curve or marginal rate of satisfaction of good X for good Y (MRSxy) must be equal to the price ratio of the two goods. i.e. MRSxy = Px / Py Slop of IC = Slop of Budget Line Second order condition : The second order condition is that indifference curve must be convex to the origin at the point of tangency.
 Consumer Equilibrium under Indifference Curve AnalysisIV. First order and Second order condition for consumer Equilibrium First order condition : Necessary Condition (1) Budget Line Should be
Tangent to the Indifference Curve: A given price line should be tangent to an indifference curve or marginal rate of satisfaction of good X for good Y (MRSxy) must be equal to the price ratio of the two goods. i.e. MRSxy = Px / Py Slope of the Price Line to be Equal to the Slope of Indifference Curve:
Price of X / Price of Y = MRS of X for Y Slop of Budget Line = Slop of IC
 Consumer Equilibrium under Indifference Curve AnalysisIV. First order and Second order condition for consumer Equilibrium Second order condition : Sufficient Condition The second order condition is that indifference curve must be convex to the origin at the point of tangency. Indifference Curve
Should be Convex to the Origin at the point of Tangency
 Consumer Equilibrium under Indifference Curve AnalysisV. Income Effect: Income consumption
Curve a) ICC of Normal Good b) ICC of Inferior good c) Luxury good
 Consumer Equilibrium under Indifference Curve AnalysisV. Income Effect: Income consumption
Curve The Income effect in economics can be defined as the change in consumption resulting from a change in real income. If the prices of goods, tastes and preferences of the consumer remains constant and there a change in his income, it will directly affect consumer’s demand. This effect on the purchase due to change in income is called the income effect.

 Consumer Equilibrium under Indifference Curve AnalysisV. Income Effect: Income consumption
Curve The Income Consumption Curve show how income effect on the quantity consumed of the good
 Consumer Equilibrium under Indifference Curve AnalysisV. Income Effect: Income consumption
Curve If the prices of goods, tastes and preferences of the consumer remains constant and there achange in his income, it will directly affect consumer’s demand. This effect on the purchase due to change in income is called the income effect.
 Consumer Equilibrium under Indifference Curve AnalysisV. Income Effect: Income consumption
Curve a) ICC of Normal Good
 Consumer Equilibrium under Indifference Curve AnalysisV. Income Effect: Income consumption
Curve a) ICC of Inferior good The good which is purchased less with the increase in income is called inferior good. Rice is inferior Wheat is inferior
 Consumer Equilibrium under Indifference Curve AnalysisV. Income Effect: Income consumption
Curve ICC - good X is Inferior and good Y is Normal Good Y ICC - good Y is inferior and good X is
Normal Good X
 Consumer Equilibrium under Indifference Curve AnalysisV. Income Effect: Income consumption
Curve ICC - good X is necessity and good Y is Luxury Good Y ICC - good Y is necessity and good X is Luxury Good X
 Consumer Equilibrium under Indifference Curve AnalysisI. Introduction to Indifference curve analysisII. Assumptions to equilibrium of the consumerIII. Indifference Map and Budget Line of consumerIV. Consumer’s Equilibrium or Maximization of SatisfactionV. First and Second order

condition for consumer equilibrium.VI. Income Effect: Income consumption Curve a) ICC of Normal
Good b) ICC of Luxury Goods c) ICC of Inferior goodVII. Conclusion
 Consumer Equilibrium under Indifference Curve Analysis Conclusion