consumer equilibrium

Consumer equilibriumclick for a larger image
Fig. 30 Consumer equilibrium. The optimal combination of Good X and Good Y is at point E when the BUDGET LINE is tangential to indifference curve 1. At this point the slope of the budget line (the ratio of prices)

consumer equilibrium

the point at which the consumer maximizes his TOTAL UTILITY or satisfaction from the spending of a limited (fixed) income. The economic ‘problem’ of the consumer is that he has only a limited amount of income to spend and therefore cannot buy all the goods and services he would like to have. Faced with this constraint, demand theory assumes that the goal of the consumer is to select that combination of goods, in line with his preferences, that will maximize his total utility or satisfaction. Total utility is maximized when the MARGINAL UTILITY of a penny's worth of good X is exactly equal to the marginal utility of a penny's worth of all the other goods purchased; or, restated, when the prices of goods are different, the marginal utilities are proportional to their respective prices. For two goods, X and Y, total utility is maximized when:

Consumer equilibrium can also be depicted graphically using INDIFFERENCE CURVE analysis. See Fig. 30 . See also REVEALED PREFERENCE THEORY,PRICE EFFECT, INCOME EFFECT, SUBSTITUTION EFFECT, ECONOMIC MAN, CONSUMER RATIONALITY, PARETO OPTIMALITY is equal to the slope of the indifference curve (the ratio of marginal utilities), so the goods’ marginal utilities are proportional to their prices.

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