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Sia ? 6 years, 3 months ago
Conditions of consumer's equilibrium (using Marginal Utility Analysis) : A consumer is said to be in equilibrium when he is getting maximum satisfaction with the given market prices and the given his or her income.
when a consumer is consuming two goods, equilibrium is achieved when
{tex}\frac { M U _ { x } } { P _ { x } } = \frac { M U _ { y } } { P _ { y } } = M U _ { m }{/tex}
Where,
MUX and MUy = Marginal utilities of good X and good y respectively
Px and Py = Price of good X and good Y respectively
MUm = Marginal utility of money. If MUm =1,
then the condition of equilibrium is reduced to
{tex}\frac { \mathrm { MU } _ { \mathrm { x } } } { \mathrm { P } _ { \mathrm { x } } } = \frac { \mathrm { MU } _ { \mathrm { y } } } { \mathrm { P } _ { \mathrm { y } } }{/tex}
Or {tex}\frac { \mathrm { MU } _ { x } } { \mathrm { MU } _ { \mathrm { y } } } = \frac { \mathrm { P } _ { \mathrm { x } } } { \mathrm { P } _ { \mathrm { y } } }{/tex}
The above condition says that the consumer will be in equilibrium at that point where the ratio of the marginal utilities of two goods is equal to ratio of the prices of the two goods.
The above conditions are based on the assumption that the Law of Diminishing Marginal Utility holds true. If MU does not fall as consumption increases, then consumer will never reach the equilibrium situation.
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