Advertisements
Advertisements
Questions
Explain consumer’s equilibrium, in case of a single commodity, with the help of a utility schedule.
Explain conditions determining how many units of a good consumer will buy at a given price.
Advertisements
Solution
A consumer is in equilibrium when the quantity purchased gives maximum satisfaction and there is no incentive to change consumption. The consumer compares the marginal utility of a unit, expressed in money, with its price.
Equilibrium condition: \[ \mathrm{MU}_X=P_X \]
The consumer must also face diminishing marginal utility as consumption increases. If marginal utility exceeds price, the consumer buys more; if it is below price, the consumer buys less.
Illustrative utility schedule (assuming marginal utility is expressed in rupees and price is ₹ 10 per unit):
| Units of X | Marginal utility (₹) | Decision |
|---|---|---|
| 1 | 20 | Buy more: MU exceeds price |
| 2 | 16 | Buy more: MU exceeds price |
| 3 | 10 | Equilibrium: MU equals price |
| 4 | 4 | Do not buy this additional unit: MU is below price |
Thus, the consumer buys 3 units. The equilibrium condition can also be written as: \[ \frac{\mathrm{MU}_X}{\mathrm{MU}_M}=P_X \] is the marginal utility of money.
