Hence, consumer will be in disequilibrium.
Consumer’s Equilibrium –
Two Commodity Case
In reality consumer spends his income on many
goods.
A rational consumer will be in equilibrium when
he consumes that quantity of Good X and Y at
which utility value of money price is equal to
marginal utility of the commodities.
Consumer’s Equilibrium –
Two Commodity Case
Suppose a consumer spends on two goods X and Y.
Then he will be in equilibrium when,
MU
X
= MU
M
X
P
X ………………
(i)
MU
Y
= MU
M
X
P
Y……………….
(ii)
Or, MU
X
/ P
X
= MU
M
and
MU
Y
/ P
Y
= MU
M
Or, MU
X
/ P
X
= MU
Y
/ P
Y
= MU
M
This is subject to money income of the
consumer being constant.
Consumer’s Equilibrium –
Two Commodity Case
The analysis is based on the assumption that
individuals seek to maximize utility.
Occurs when the consumer has spent all income
and the marginal utilities per dollar spent on each
good purchased are equal:
where the letters
A
–
Z
represent all the goods a
person buys.
Consumer’s Equilibrium
Conditions
–
Utility Approach
MU
x
= P
x
in case of one commodity case
MU
x
/ P
x
= MU
y
/ P
y
= MU
m
in case of two
commodity case
MU
x
/ P
x
= MU
y
/ P
y
= ……. =
MU
m
in case of
multiple commodity case

11/7/2015
5
Working of Consumer’s
Equilibrium- 2 Commodity Case
Suppose a consumer spends all his income and gets 10 units of X and
10 units of Y .
If MU
x
= 30 utils
MU
Y
= 20 utils
and
P
X
= Rs.1
P
Y
= Rs.1
Here, MU
X
/ P
X
= 30/1 = 30
MU
Y
/ P
Y
= 20/1 = 20
Therefore, MU
X
/ P
X
> MU
Y
/ P
Y
Since consumer is getting more satisfaction in X than Y, he will buy
more of X than Y.
Working of Consumer’s
Equilibrium- 2 Commodity Case
Since MU diminishes as the consumer buys more of X and MU rises
as he buys less of Y,
Now MU
x
= 25 utils
MU
Y
= 25 utils
and
P
X
= Rs.1
P
Y
= Rs.1
Here, MU
X
/ P
X
= 25/1 = 25
MU
Y
/ P
Y
= 25/1 = 25
Therefore, MU
X
/ P
X
= MU
Y
/ P
Y
Since
the satisfaction derived from X is equal to Y, he will be in
equilibrium.
Working of Consumer’s
Equilibrium- 2 Commodity Case
If the price of X and Y is different.
Suppose a consumer spends all his income and gets 10 units of X and
10 units of Y .
If
MU
x
= 30 utils
MU
Y
= 20 utils
and
P
X
= Rs.1
P
Y
= Rs.2
Here, MU
X
/ P
X
= 30/1 = 30
MU
Y
/ P
Y
= 20/2 = 10
Therefore, MU
X
/ P
X
> MU
Y
/ P
Y
Since consumer is getting more satisfaction in X than Y, he will buy
more of X than Y.
Working of Consumer’s
Equilibrium- 2 Commodity Case
Since MU diminishes as the consumer buys more of X and MU rises
as he buys less of Y,
Now MU
x
= 20 utils
MU
Y
= 40 utils
and
P
X
= Rs.1
P
Y
= Rs.2
Here, MU
X
/ P
X
= 20/1 = 20
MU
Y
/ P
Y
= 40/2 = 20
Therefore, MU
X
/ P
X
= MU
Y
/ P
Y
Since
the satisfaction derived from X is equal to Y, he will be in
equilibrium.
Cardinal Utility Theory :
CRITICISM
Utility is subjective
Cardinal measurement of utility not possible specially in
terms of money is not possible.
Every commodity is not independent commodity.

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- Fall '13
- BrandonMalloy
- Microeconomics, Utility, Consumer, MUy