Study GuideEconomics–Theory of the Consumer1. Consumer Equilibrium1.1What Is Consumer Equilibrium?When consumers decide how much of different goods and services to buy, their main goal is togetthe maximum possible satisfaction, also calledtotal utility.However, consumers cannot buy everything they want. They face two main limitations:•Limited income (budget)•Prices of goods and servicesTrying to get the highest total utility while staying within these limits is called theconsumer’sproblem.Thesolutionto this problem—where the consumer chooses the best combination ofgoods—is known asconsumer equilibrium.1.2How Is Consumer Equilibrium Determined?To understand this idea clearly, let us start with a simple case.Suppose a consumer buys onlytwo goods:•Good 1•Good 2The consumer:•Knows the prices of both goods•Has a fixed budget•Spends theentire budgeton these two goodsThe consumer reaches equilibrium when thesatisfaction gained from the last rupee spent oneach good is the same.In other words, the consumer distributes spending so that:The marginal utility per rupee spent on Good 1 is equal to the marginal utility per rupee spent onGood 2.Preview Mode
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