Consumer equilibrium
Also called: Consumer's optimum, optimal choice of the consumer · Topic: Consumer Behaviour, Demand and Elasticity · NCERT: Class 12, Ch 2 "Theory of Consumer Behaviour"
Meaning
Consumer equilibrium is the bundle that gives a rational consumer the most satisfaction within her budget. It lies on the budget line, where the line just touches (is tangent to) the highest indifference curve she can reach. At this point the slope of the indifference curve equals the slope of the budget line:
MRS = p₁/p₂
So what she is willing to swap equals what the market lets her swap. In cardinal terms, the same condition is MUx/Px = MUy/Py: the marginal utility per rupee is the same for every good. Sometimes the best point is a corner solution, where all income goes on one good.
Example
Suppose her MRS is 2 but both goods cost the same, so the price ratio is 1. She would give up 2 mangoes for one more banana, but the market asks for only 1. So she buys more bananas, and MRS falls until it equals 1. That point is her equilibrium.
Don't confuse with
- Market equilibrium: the price at which market demand equals market supply. Consumer equilibrium is about one buyer's best choice at given prices.