Equilibrium refers to the state of rest or in other words; it can be described as a position of no change. Consumer equilibrium refers to the state that consumer achieves where he does not want to change his level of consumption. It is determined by the number of goods and services that a consumer will consume in order to derive maximum satisfaction without the need for changing or adding any more goods or service.
Consumer equilibrium is determined by the indifference curve and budget line.
Meaning of Indifference Curve
An indifference curve is a graph which shows a combination of two goods that can give the consumer equal satisfaction and utility. As each point on an indifference curve provides the same level of satisfaction to the consumer; hence, the consumer is indifferent or prefers each of the points equally. Therefore, it is termed as the indifference curve.
In the above graph, both Good A and B are providing the consumer equal level of satisfaction, so the consumer will be happy to choose any one of them provided all other factors remain constant.
A budget line shows the combination of two products that a consumer can afford to purchase utilizing all the available budget at his disposal.
Consumer equilibrium can be studied using two of the following conditions:
- Consumption of a single commodity
- Consumption of two commodity
Consumer equilibrium in case of a single commodity
A consumer when purchasing a single commodity is said to be at equilibrium when he is buying a quantity of that commodity, which provides him with maximum satisfaction. The number of units that can be consumed from the given commodity by a consumer will depend on two factors:
- The price of the given commodity and
- Marginal utility of each successive unit.
Consumer equilibrium in case of two commodities
In the real world, a consumer is seen to consume more than one commodity, so in such a case law of equi-marginal utility is used to determine the allocation of income to obtain maximum satisfaction.
As per the law of Equi-marginal utility, a consumer will get maximum satisfaction, when ratios of Marginal Utility (MU) of two commodities and their respective prices become equal, and MU falls with respect to increase in consumption.
To learn more such interesting concepts, check out the Business studies class 12section of BYJU’S.