CONSUMER EQUILIBRIUM, IN CASE OF A TWO COMMODITY

• He will attain equilibrium only if he allocates his given income on purchase of good X and Y in such a way that per rupee MU of both the products is equal and he gets maximum TU.
• Any change in this combination will reduce his total satisfaction.

First Condition: \(MU_{x}= MU_{y}\)                                                                                         Px               Py

Where, \(MU_{x}\) = Marginal Utility of commodity X; \(P_{x}\) = Price of commodity X

\(MU_{y}\)= Marginal Utility of commodity Y; \(P_{y}\)  = Price of commodity Y

Second Condition: MU declines with increase in consumption i.e. Law of Diminishing Marginal Utility operates.

If \(MU_{x}\) is not equal to \(MU_{y}\) then the consumer is not in the state of equilibrium.

\(P_{x}\) \(P_{y}\)

If \(MU_{x} > MU_{y}\)

Px Py

then per rupee \(MU_{x}\) > per rupee \(MU_{y}\) . So, consumer will buy more of X and less of Y.

This will reduce \(MU_{x}\) and increase \(MU_{y}\) . These changes will continue until

\(MU_{x} = MU_{y}\)

\(P_{x}\)    \(P_{y}\)

———————————————————————————————-

If \(MU_{x}< MU_{y}\)

Px Py

then per rupee \(MU_{x}\) < per rupee \(MU_{y}\). So, consumer will buy more of Y and less of X.

This will reduce \(MU_{y}\) and increase \(MU_{x}\). These changes will continue until

\(MU_{x}/P_{x}= MU_{y}\)

\(P_{x}\)   \(P_{y}\)

Condition no. 2. Unless MU falls as more of a good is consumed the consumer will not reach at equilibrium level.