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Consumer’s equilibrium with one commodity

In an economy, where the commodities are available freely, the consumer will go on consuming a commodity, till marginal utility becomes zero. At that point consumer gets maximum satisfaction and will be in equilibriun.
 
But in an economy, where consumer has to pay, he will be in equilibrium, when Marginal Utility is equal to Price. At this point consumer gets maximum satisfaction and will be in equilibrium. How many units of commodity, that the consumer buys to get maximum satisfaction depends on the price of the commodity.
 
A consumer continues to demand a commodity till Marginal Utility, that he gets is greater than Price. He stops when Marginal Utility is equal to Price. This concept could be explained with an example:

 

No. of times

Market Price of commodity

M. Utility Derived

MU > Price

1

10

15 Utils

2

10

12 Utils

3

10

10 Utils

MU = Price

4

10

8 Utils

MU < Price

5

10

6 Utils

Assumptions of the example:

  • Market Price of the commodity remains constant.
  • Law of Diminishing Marginal Utility operates.
  • No substitutes available. The consumer has to buy the same product.
The same concept could be explained in the form of a diagram.
 
Description: 19172.png
 
In the diagram, Marginal Utility curve slopes downward and market price remains constant.
 
If the consumer purchases OM quantity of commodity, at this level MU > Price and this will induce him to purchase more.
 
If the consumer purchases ON quantity of commodity, at this level MU = Price, consumer gets max satisfaction and will be in equilibrium.




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