Consumer equilibrium refers to the point where a consumer achieves the highest possible total satisfaction (total utility) from their given income by optimally allocating resources between two commodities. In the context of a two-commodity model, this equilibrium is reached when the consumer allocates their income in a way that maximizes the utility from the two goods, X and Y, ensuring that the marginal utility per rupee spent on both goods is equal.

What is Consumer Equilibrium?

Suppose a consumer consumes only two goods, X and Y. The consumer will be in equilibrium only if the marginal utility per rupee spent on both goods is equal. This means:

MUx/Px = MUy/Py

Where:

• MUx = Marginal Utility of commodity X

• Px = Price of commodity X

• MUy = Marginal Utility of commodity Y

• Py = Price of commodity Y

If the consumer follows this rule, they will be in a state of equilibrium, where they cannot increase their satisfaction by reallocating their spending.

Conditions for Consumer Equilibrium in a Two-Commodity Model

For a consumer to be in equilibrium, the following conditions must hold true:

1. First Condition (Equality of Marginal Utility per Rupee):
   The marginal utility per rupee spent on each good must be the same. This condition ensures that the consumer maximizes their utility by spending their income efficiently. Mathematically: $\frac{MUx}{Px} = \frac{MUy}{Py}$

2. Second Condition (Law of Diminishing Marginal Utility):
   The law of diminishing marginal utility states that as a consumer consumes more of a good, the marginal utility derived from each additional unit decreases. For equilibrium to be reached, the marginal utility of both goods must decline as consumption increases.

How Consumer Equilibrium is Achieved

• When MUx/Px > MUy/Py:
  This indicates that the consumer is getting more utility per rupee from commodity X than from commodity Y. Therefore, the consumer will purchase more of good X and less of good Y. This will result in a decrease in the marginal utility of X and an increase in the marginal utility of Y. The consumer will continue adjusting their consumption until the marginal utility per rupee spent on both goods becomes equal.

• When MUx/Px < MUy/Py:
  If the marginal utility per rupee spent on X is less than that for Y, the consumer will buy more of Y and less of X. This will reduce the marginal utility of Y and increase the marginal utility of X. The consumer will keep adjusting their purchases until both commodities provide equal utility per rupee spent.

Conclusion

The equilibrium condition is achieved when the marginal utility per rupee spent on both goods is equal, and when the law of diminishing marginal utility is in effect. Any deviation from this equilibrium will lead to a lower total utility for the consumer, which means they will continue to adjust their consumption until equilibrium is restored.