Question

Explain why consumer's equilibrium is attained when the marginal utility of a product is equal to its price.

Answer 1

When a product's marginal utility equals its price, a consumer has reached their equilibrium since this represents the moment at which they maximise their overall utility.

1. When a product's marginal utility equals its price, the consumer reaches equilibrium since they are maximising their overall utility.
2. A buyer will keep buying more of a product when its marginal utility is higher than its price because the extra benefit it provides outweighs the cost.
3. On the other hand, the consumer will cut back on consumption if the marginal utility is lower than the price because the additional utility obtained will be less than the expense.
4. Consequently, equilibrium results when the consumer is content with the trade-off between the price paid and the utility acquired, which occurs when the marginal utility equals the price.