Question

Illustrate a consumer’s equilibrium choice and how it changes in response to changes in prices and income.

Short answer

The objective of the consumer is to choose the consumption bundle that maximizes his satisfaction. This condition is called consumer's equilibrium. It relates to consumer’s willingness to buy something.

Step-by-step solution

Introduction

If there were no scarcity, the people would want to follow the more-is-better property. We want to consume bundles that contain infinite amounts of goods. However, one implication of scarcity is that the consumer must select a bundle that lies inside the budget set, that is, an affordable bundle.

Describe consumer’s equilibrium

Consumer's equilibrium refers to a situation of maximum satisfaction while spending a consumer's given income on different goods. The consumer is in equilibrium when, given his income and market prices, he plans his expenditure to maximize his total satisfaction. Here, equilibrium refers to the fact that the consumer has no incentive to change to a different affordable bundle upon reaching the point of equilibrium.

When the price of commodity changes, the budget line pivots inward or outward. A decrease in the price pivots the budget line rightwards and vice-versa. An increase in income shifts the budget line rightwards, and a decrease in the income shifts the budget line leftwards.

Figure 2: Change in consumer equilibrium due to a decrease in the price of Good X. Here, good $Y$is a substitute for$X$.

Figure 3: When the price of Good $X$falls, the consumption of complementary good$Y$ rises.