What is Consumer Equilibrium?

What is Consumer Equilibrium?

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Rashmi
Rashmi Karan
Manager - Content
Updated on Dec 13, 2023 17:39 IST

The consumer’s equilibrium is when he finds his greatest utility for prices and income. A consumer is in equilibrium when his income is sufficient to obtain the desired goods. The article covers the concept of Consumer Equilibrium in economics, its graphical representation, formula and examples.

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What is Consumer Equilibrium?

Consumer equilibrium refers to a situation in microeconomics where a consumer achieves the highest level of satisfaction or utility (satisfaction or well-being) from the goods and services they choose to consume, given their budget constraint and the prices of those goods and services. In other words, it represents the point at which consumers maximise their overall satisfaction or utility while staying within their budget.

The balance can be obtained from the combination of two goods, which are within reach of the consumer’s financial budget. In this way, the possibility of a higher level of satisfaction can be achieved where the indifference curve is higher.

One way to obtain the balance of the consumer is through the knowledge of what the consumer likes and his economic limitations. This will depend on the income that he has and the prices that the market understands.

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Despite this, some balance changes may arise due to the following:

Price Increase

Through consumer theory, various alternatives are presented on how a consumer’s behaviour could be when a series of variations in price, income, tastes, and preferences are presented.

Income Effectiveness, Tastes, and Preferences

All these elements induce the consumer to make the right decisions about acquiring or purchasing goods and represent their behaviour.

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Consumer equilibrium can be achieved when –

  • The consumer is satisfied with the goods and services purchased, despite the limitations of income and prices.
  • The equilibrium a consumer reaches is due to the products related to the number of goods and services they buy, thanks to their current income level.

This type of balance allows consumers to benefit from their purchases, even knowing the potential of the products consumed by the competition.

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Consumer Equilibrium Graph

The consumer’s equilibrium can be represented graphically as a point of tangency where the indifference curve and the economic constraint meet. Therefore, this equilibrium is obtained when the slope of the indifference curve and the slope of the consumer’s budget line have the same level of equality.

The above graph illustrates consumer equilibrium, where – 

AB – Budget line 

I, II, and III – Indifference curves. They are a portion of an individual’s indifference map. 

Given the limited income sources, a consumer cannot attain a position beyond the budget line. R, E represent infinite numbers of attainable bundles on AB, and T. These and the points on the budget line AB are attainable with the limited income of the consumer.

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Consumer Equilibrium Formula

Consumer equilibrium is a part of the consumer theory of economics. Within consumer theory, utility refers to the ability to satisfy the needs of a consumer. Knowing that goods and services are valued differently by each individual, academics have created a formula to measure consumer equilibrium, which is – 

MUx ÷ Px = MUy ÷ Py

Where,

  • MUx: The marginal utility derived from a particular good, identified here by the letter x. MUx represents a consumer’s additional satisfaction if he purchases one more unit.
  • Px: The price of the goods identified by the letter x.
  • MUy: The marginal utility derived from another good is y. It also represents a consumer’s extra satisfaction from having one more unit.
  • Py: The price of the goods identified by the letter y.

The marginal utility can be positive, negative, or zero. Let’s see what each result means.

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Positive Marginal Utility

Positive marginal utility occurs when obtaining more than one item brings additional satisfaction to the consumer. Suppose you like to eat a slice of lemon cake, but a second slice would bring you extra joy. So your marginal utility from consuming pie is positive.

Negative Marginal Utility

Negative marginal utility occurs when consuming too much of an item can cause you harm. For example, eating two whole lemon tarts can make you sick.

Zero Marginal Utility

Zero marginal utility happens when consuming more than one item does not bring additional satisfaction. For example, you may feel quite full after two brownie slices and crave it even after having a third slice. In such a scenario, your marginal utility from eating brownies is zero.

What is the Consumer’s Break-Even Point?

The consumer’s break-even point occurs when they find the most significant possible utility and satisfaction in a commodity, given their income or budget. The consumer must spend his limited budget on the goods that give him the highest marginal utility per dollar.

As you may have already inferred, the consumer’s break-even point will depend on the individual’s budget constraint and the price of the products/services. Therefore, when the ratio MU ÷ P is the same for all goods, the consumer maximizes his total utility.

Consumer theory believes that there is a tendency for all goods and services to reach a zero marginal unit. When this happens, the consumer no longer needs the product and ends consumption.

Examples of Consumer Equilibrium

To help you better understand the concept of marginal utility and break-even point, we have created three fictitious scenarios to illustrate their application.  

Positive Marginal Utility Example 

Shailesh goes to the market and buys two bars of chocolate. Knowing some friends will visit her that day. He buys four more bars. The marginal utility is positive since he does not need to return to the market for a new purchase, and his budget covers the additional items.

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Negative Marginal Utility Example

Lopa has diabetes and can eat a limited amount of sweets each day. If she buys more than one chocolate bar at the market and consumes it, she may be sick. In this case, the additional elements do not bring more satisfaction but rather a risk or problem. In this case, marginal utility is negative.

Zero Marginal Utility Example

On the other hand, Pranati lives alone and won’t be having his friends over anytime soon. If she has one candy bar and decides to buy four more, it exceeds her consumption capacity, which may mean zero marginal utility.

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Conclusion

Every consumer strives to attain maximum satisfaction from the commodity he invests in. This satisfaction derives from benefits arising from the consumption of the product. After achieving consumer equilibrium, he will be in no state of further change. The level of satisfaction will only go down after this stage.

About the Author
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Rashmi Karan
Manager - Content

Rashmi is a postgraduate in Biotechnology with a flair for research-oriented work and has an experience of over 13 years in content creation and social media handling. She has a diversified writing portfolio and aim... Read Full Bio