“A consumer consumes only two goods X and Y”. State and explain the conditions of consumer’s equilibrium with the help of utility analysis.
In case of two commodities, the consumer’s equilibrium is attained in accordance with the Law of Equi-Marginal Utility. It states that a consumer allocates his expenditure on two goods in such a manner that the utility derived from each additional unit of the rupee spent on each of the commodities is equal. That is,
Marginal Utility of a Rupee spent on commodity x = Marginal Utility of a Rupee spent on commodity y = Marginal Utility of Money
Or ` (Mu_x)/P_x=(MU_y)/(P_y)=Mu_m`
In the diagram, OO1 represents the total income of a consumer. MUx and MUy represent the Marginal Utility curves of commodity X and commodity Y, respectively. Equilibrium is established at point E, where, MUx and MUy intersect each other and with MUy.
At this point, OM amount of income is spent on commodity X and the remaining amount of income MO1 is spent on commodity Y.
Suppose, instead of point M, the consumer is at point S, where he spends OS amount of income on commodity X and SO1 amount of income on commodity Y. At point S, however;
Thus, the consumer would increase his consumption of commodity X till the equality is achieved. That is, in other words, the consumer increases his consumption of good X till he reaches point E where,