Econ – Oct 14
Today – Consumer equilibrium, market demand, consumers’ surplus
Consumer Equilibrium – the consumer equilibrium is defined as those levels of the
quantities such that the consumer’s utility is maximize. A consumer equilibrium is
achieved when the consumer has no incentive to reallocate her/his budget or to buy a
different bundle of goods.
In general, consumer equilibrium must satisfy two conditions:
1 – the consumer must spend all of her/his income. (doesn’t allow for savings or
borrowing money to avoid present value calculations)
2 – the marginal utility of good one divided by price one must equal marginal utility of
good two divided by price two which equals marginal utility of good n divided by price n
(equimarginal in consumption)
Not Equilibrium: MU1/P1 MU2/P2
Equilibrium: MU1/P1 = MU2/P2
This equation is affected by income, preferences and price one and price two.
This equation tells us P1 and Q1 (point on demand curve for good 1) and P2 and Q2 (one
point on different demand curve for good 2).
To find another point on demand curve for good 1, hold everything constant except for
P1. If you increase price MU1/P1* gets smaller and is