Consumer Equilibrium
Consumer equilibrium refers to the point at which a consumer maximizes their satisfaction or utility from the goods and services they purchase, given their budget constraint. It occurs when the consumer allocates their income in a way that the marginal utility per dollar spent is equal across all goods and services. This balance reflects the most efficient allocation of resources to achieve the highest level of satisfaction.
5 Key excerpts on "Consumer Equilibrium"
eBook - ePubMedia Economics
Applying Economics to New and Traditional Media
- Colin Hoskins, Stuart M. McFadyen, Adam Finn(Authors)
- 2004(Publication Date)
- SAGE Publications, Inc(Publisher)
...Many have argued that it could better achieve its objectives by concentrating its efforts on national programming of the sort undersupplied by commercial broadcasting (see, for example, Hoskins & McFadyen, 1996). It is often difficult to quantify the effect of an expenditure on objectives, so the equimarginal principle may not give an unambiguous answer. However, it provides a way of thinking about and analyzing a problem and a framework for the decision-making process. 4.12 Summary In this chapter, we examined consumer behavior in allocating a limited income among many desired goods and services. An understanding of consumer behavior is essential to an appreciation of the nature of demand by an individual. Important concepts are highlighted here. The Law of Diminishing Marginal Utility states that after a certain number of units of product X have been consumed in a given time period, each additional unit of product X consumed yields less addition to total utility than the previous unit. It is because of this law that people generally see movies only once. It also explains why more movie videos are rented than purchased. The objective of the consumer is assumed to be to maximize utility from consumption. A consumer is in equilibrium when, subject to budget constraints, he or she allocates expenditure between goods in such a way that the last dollar spent on each good purchased yields the same addition to total utility. To state the Theory of Consumer Behavior more formally, the conditions for equilibrium are as follows: An increase in the price of X leads to MU X /P X being less than MU Z /P Z. To regain equilibrium, the consumer decreases the quantity of X demanded, which, as a consequence of the Law of Diminishing Utility, increases MU X until the last dollar spent on each product again yields the same addition to total utility...
eBook - ePubMicroeconomics
A Global Text
- Judy Whitehead(Author)
- 2014(Publication Date)
- Routledge(Publisher)
...For a basket comprising two goods x and y, the total utility (U) for the consumer is the sum of the utilities gained from the two goods. This may be expressed as: U = U x + U y 2.2.2 Consumer Equilibrium under the Cardinal theory Consider a single commodity (x), the price of which is given. The consumer seeks to maximize the utility from consuming the commodity. The maximation of utility — Consumer Equilibrium According to the Cardinal theory, the equilibrium of the consumer is derived as set out below. Utility for the individual consumer depends on the quantity consumed of commodity x. Thus the utility function for the consumer is expressed as: On buying Q x the consumer has an expenditure on good x (E x) such that: The consumer’s objective is to maximize the difference between utility received and the expenditure made on the good. This objective function may be expressed as: The calculus of variations is used in order to precisely identify an optimum position. For this, the partial derivative of the objective function with respect to Q x must be set equal to zero. This may be expressed as: Or: Rearranging, this gives: Since: this gives: Hence, the consumer achieves equilibrium (maximum satisfaction) when the incremental utility (utility from the last unit) derived from a commodity is just equal to the given price of that commodity. The corollary is that, where the incremental utility is greater than the price the rational consumer buys more units of the commodity as the satisfaction from that extra unit of the commodity is greater than the cost of the unit. Correspondingly, when the satisfaction derived from that extra unit of the commodity is less than the price for that unit, the consumer would not be willing to pay for that unit. This works well as long as it is considered that utility can be measured in money units (i.e...
eBook - ePubEconomics for Investment Decision Makers
Micro, Macro, and International Economics
- Christopher D. Piros, Jerald E. Pinto(Authors)
- 2013(Publication Date)
- Wiley(Publisher)
...The investor’s choice of a portfolio on the frontier will depend on her level of risk aversion. EXHIBIT 2-10 The Investment Opportunity Frontier Note: The investment opportunity frontier shows that as the investor chooses to invest a greater proportion of assets in the market portfolio, she can expect a higher return but also higher risk. 5. Consumer Equilibrium: MAXIMIZING UTILITY SUBJECT TO THE BUDGET CONSTRAINT It would be wonderful if we could all consume as much of everything as we wanted, but unfortunately, most of us are constrained by income and prices. We now superimpose the budget constraint onto the preference map to model the actual choice of our consumer. This is a constrained (by the resources available to pay for consumption) optimization problem that every consumer must solve: choose the bundle of goods and services that gets us as high on our ranking as possible, while not exceeding our budget. 5.1. Determining the Consumer’s Equilibrium Bundle of Goods In general, the consumer’s constrained optimization problem consists of maximizing utility, subject to the budget constraint. If, for simplicity, we assume there are only two goods, wine and bread, then the problem appears graphically as in Exhibit 2-11. EXHIBIT 2-11 Consumer Equilibrium Note: Consumer Equilibrium is achieved at point a, where the highest indifference curve is attained while not violating the budget constraint. The consumer desires to reach the indifference curve that is farthest from the origin while not violating the budget constraint. In this case, that pursuit ends at point a, where the consumer is purchasing W a ounces of wine along with B a slices of bread per month. It is important to note that this equilibrium point represents the tangency between the highest indifference curve and the budget constraint. At a tangency point, the two curves have the same slope, meaning that the MRS BW must be equal to the price ratio, P B / P W...
eBook - ePub- Ralph Turvey(Author)
- 2022(Publication Date)
- Routledge(Publisher)
...Chapter 6 EQUILIBRIUM, PRICES, DEMAND AND SUPPLY DOI: 10.4324/9781003283225-6 6.1. Equilibrium as an analytical device In an earlier chapter the approach via one thing at a time was introduced. It was explained that although other things rarely are equal, the unrealistic assumption that they are is nevertheless a useful aid to thought. We now come to the concept of equilibrium, a notion whose use ought to be viewed in the same way. The point about equilibrium is that whether or not it frequently exists in practice, the assumption that it exists is an aid to reasoning. Equilibrium in a market is a state of affairs which is not subject to disruption by internal forces. It may involve no change at all, or it may involve steady growth or decline; in either case there is consistency between the plans and expectations of the buyers and of the sellers. Its opposite is disequilibrium. This exists, for example, if: - some of the sellers are losing money and will eventually cease to supply; - purchases continually exceed production, so that stocks in the hands of sellers are continually falling; - orders continually exceed deliveries, so that unfilled orders are continually growing. Economic theorists use the concept of equilibrium in a market as follows. They first suppose an equilibrium to exist. They next assume some external factor to be different - we can take as an example the existence of value added tax on the product. Then they work out what the equilibrium state of affairs would be under this alternative assumption. Finally they compare the two equilibria, regard the differences between them as the consequence of value added tax, and say that this, that, and the other are the effects of purchase tax. If the two equilibria which are thus compared are stationary equilibria, as in most textbook theory, the approach is called ‘Comparative Statics’...
eBook - ePubIntermediate Microeconomics
Neoclassical and Factually-oriented Models
- Lester O. Bumas(Author)
- 2015(Publication Date)
- Routledge(Publisher)
...CHAPTER THREE Equilibrium and Its Attainment Microeconomics is frequently called price theory. Perceptive readers may be surprised at this since conventional definitions of the field omit use of the word price and seem to stress quantity. Frank Knight’s formulation emphasized the quantity of the various products to be produced and their distribution. Lionel Robbins’s approach stressed the quantities of resources allocated to the production of the various goods and services. The argument justifying the narrowness which can be associated with the words price theory arises from the assumption that quantities demanded and supplied are principally a function of price. This makes price a profoundly important variable in theory. The idea that supply and demand set price came from the independent works of the great English philosopher John Locke and his countryman Sir Dudley North. Both published papers on this in 1691. Until that time the ruling price doctrine was the theory of just price, the work of the greatest of the scholastic writers, the thirteenth-century cleric St. Thomas Aquinas. According to St. Thomas, the just price of the necessities and other conventional goods is equal to the reasonable cost of their production. Locke and North, in successfully arguing that price is and should be set by the forces of supply and demand, came close to destroying the moral content of economic activity. This was advantageous to them. Locke’s business activities were highly speculative; North was a wealthy trader skillful at buying cheap and selling dear. In this chapter the roles of price are first considered. Then the price-setting institution, the market is examined. Two processes of attaining equilibrium are discussed. In Leon Walras’s approach, discrepancies between quantities supplied and demanded at the existing price, bring about the price change required to equalize these quantities...
