A consumer is in equilibrium with his tastes, and the price of the two goods, which he spends a given money income on the purchase of two goods in a way as to get the main satisfaction. According to Koulsayiannis, “The consumer is in equilibrium when he maximizes his utility, given his income and the market prices.”
What conditions are to be fulfilled to attain consumer’s equilibrium when a consumer is consuming only one good?
Conditions of Consumer’s Equilibrium for One Commodity. A consumer attains equilibrium at such level where marginal utility derived from the consumption of a commodity is equal to its one unit price. Marginal utility is the change in the total utility of a commodity.
What are the conditions necessary for consumer equilibrium under the marginal utility theory?
For a consumer “to be in equilibrium with respect to all goods, the marginal significance of all goods in terms of money must equal their money prices.” Now if price of commodity X falls, if the fraction is still to be equal to k which is constant, the numerator, i.e., the marginal utility of X must also fall.
How does a consumer achieve equilibrium According to this approach?
The Ordinal Approach to Consumer Equilibrium asserts that the consumer is said to have attained equilibrium when he maximizes his total utility (satisfaction) for the given level of his income and the existing prices of goods and services.
What are the two conditions of consumer’s equilibrium?
There are three conditions for consumer’s equilibrium:
- (1) The Budget line should be Tangent to the Indifference Curve.
- (2) At the point of Equilibrium the Slope of the Indifference Curve and of the Budget Line should be the same.
- (3) Indifference curve should be Convex to the Origin.
Which is the correct condition for consumer equilibrium?
For the two-good case, the condition for consumer equilibrium is: MU X /p X ≠ MU Y /p Y [eq. (5.2)]
Which is the consumer’s equilibrium point on the indifference curve?
Since all other combinations lie on lower indifference curves, they represent lower levels of satisfaction than combination S which is the consumer’s equilibrium point. We may thus enumerate the conditions of consumer’s equilibrium. The consumer is in equilibrium when his budget line is tangent to an indifference curve.
What is the budget equation for consumer’s equilibrium?
This is because, algebraically I = P x X + P y, where I represents the consumer’s income, P x and P y the prices of goods X and Y, respectively. This budget equation is the equation of the line connecting the points Q and P, where Q = I /P x and P = I/P y.
What are the last conditions for equilibrium to occur?
Therefore, the last conditions are that at the point of equilibrium, the marginal rate of substitution of X for Y must be falling for equilibrium to be stable. It means that the indifference curve must be convex to the origin at the equilibrium point. If the indifference curve is concave to the origin at the point R, the MRS xy increases.
