Discuss the consumer equilibrium in two …

Condition of consumer's equilibrium (in case of two commodities)



Consumer's equilibrium in case of two commodities through utility approach is attained when ratio of MU of a commodity to its price becomes equal to the ratio of MU of the other commodity to its price. Symbolically it is expressed as   i.e., ratio of MU of commodity x to its price     s equal to ratio of MU of commodity y to its price    The equation also implies if price of commodity x is equal to price of commodity y (if P_x = P_y), the consumer will attain equilibrium when MU_x = MU_y.

It also means that satisfaction is maximum when a rupee worth of MU is same in both the goods x and y. This is proved in the following utility schedule of a consumer who has र 20 with him to spend on two goods x and y. Further suppose price of each unit of x (say tea) is र 5 and that of y (say biscuits) is र 2. How will consumer attain his equilibrium?

For obtaining maximum satisfaction from spending his given income of र 20 the consumer will buy 2 units of x (say, tea) by spending र 10(= 2 × 5) and 5 units of y (say, biscuits) by spending र 10(= 5 × 2). This combination of goods brings him maximum satisfaction (or state of equilibrium) because a rupee worth of MU in case of good x is    and in case of good y is also   

= MU of a rupee or money). Remember, a consumer's maximum satisfaction is subject to budget constraints, i.e., the amount of money to be spent by a consumer.

One major limitation of Utility Approach is that it is measured in cardinal number (i.e., in exact numbers like 1, 2, 3 ....) and also utility being a subjective thing is incapable of being measured in exact numbers.