Economics » Theory of Consumer Behaviour » Consumer Equilibrium

# Marginal Analysis

## Marginal Analysis

Consumer equilibrium refers to a situation in which consumers cannot increase the total utility they obtain from a given budget (i.e. the amount of money they have to spend at any given time) by shifting expenditure from one good to another. For a consumer that has a given amount of money to spend on two goods, the consumer equilibrium condition is said to prevail if the marginal utilities per naira worth of the two goods are the same. Assuming a consumer has a given amount of money income to spend on meat pie and soft drink, the equilibrium condition in equation form is:

$$\cfrac{MU_m}{P_m} = \cfrac{MU_s}{P_s}$$ ———————————- Equation 5.1

Subject to $$Y = P_mQ_m + P_sQ_s$$ —————————————- Equation 5.2

Where:

$$MU_m$$ = marginal utility of meat pie
$$MU_s$$ = marginal utility of soft drink
$$P_m$$ = unit price of meat pie
$$P_s$$ = unit price of soft drink
$$Y$$ = consumer’s money income

Equation 5.2 is called the consumer’s budget constraint. Equations 5.1 and 5.2 are also referred to as the necessary and sufficient conditions for consumer equilibrium respectively. The consumer equilibrium condition is alternatively referred to as utility maximisation condition.

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