Consumer equilibrium
Consumer equilibrium refers to the state of balance obtained by customers that refer to the number of products and services they can purchase, given the current cost price and the level of income. Consumer equilibrium enables end-users to get the most satisfaction from their income. When the consumer spends income on purchasing one or more product, they get maximum satisfaction, and they don’t change the level of consumption even when given the price of products. In this, consumers attain a maximum of satisfaction of product and service and no position to rearrange the purchase.
Consumer equilibrium is essential to consumers, and it helps them not change their decision is their t but earning more and change the quantities of the product they buy. In consumer equilibrium, the end-user purchases commodity when the commodity’s price is equal to the marginal utility. When the condition fails to be fulfilled, consumers end up purchasing more or fewer commodities.
Consumer equilibrium helps to determine the buying behavior of the customer. Suppose the customer purchase more product the marginal utility(MU) fall, and in this situation, the Price(P) paid higher than MU. Therefore, to avoid negative utility, the customer will likely reduce consumption where MU will be increasing until P=MU. In the situation where MU is higher than the price, the consumer will enjoy the satisfaction of the product he has consumed. Consumers buy more units of products at this state, leading to a fall in MU until it is equated to the price. Buy buying less ore more products; consumers will settle at an equilibrium level where P= MU and total utility is maximum.
A rational consumer will continue purchasing either more or less commodity until marginal utility meets its price. Consumer equilibrium enables the consumer to maximize their utility from the consumption of commodities. Also, it helps to arrange a combination of product which is based on consumer preference of maximum utility. Consumer equilibrium is used to make to solve problem help consumer to decide how much commodities to consume.
The figure above shows an example of the sufficient conditions of consumer equilibrium. It indicates that the MU curve intersects the price curve PP at two points, M and N. When having OA quantity, the consumer ensures he reaches a point where P=MU but at this condition is not in equilibrium level. When purchasing extra OA, the customer enjoys a surplus. The customer will continue using commodities until he reaches point OB. If the user goes beyond this point for an additional commodity unit, p will be greater than MU, causing him to suffer dissatisfaction. This consumer’s sufficient condition, the MU curve, should intersect the price cure in downward but not in the rising segment.
The consumer equilibrium concept is also essential to reflect the optimum purchase of consumers. Often consumer buys product up to the mount at which P=MU. Maximum satisfaction needs allocation of income in a way that MU of units of the product purchased is proportional to their price.
The marginal rate of substitution (MRS)
The marginal rate of substitution refers to the amount of good consumer is willing to the consumer to the relation of other goods, and the new good is equally satisfying. In economic MRS, consumer deal with the amount of good that is substitutable for another good. It involves a sloping curve is known as the indifference curve, and every point along this curve shows the quantities good that is worth substituting each other.
The slope of the indifference curve is significant to the analysis of the marginal rate of substitution. At any point in the indifference curve, MRS is represented by the slope on that point. Many indifference curves are curves, and slopes change as one moves along. Sometimes indifference curve is indicated by straight lines slope is constant. As a result, the indifference curve is shown a downward straight line. When the MRS is increasing, the indifference curve will be convex at the origin. The situation is not common because it states that if a consumer consumes more X, Y’s consumption would also increase and vice versa. When marginal substitution is diminishing, consumers choose the substitutes for another good rather than consuming more.
At the equilibrium consumption level, MRS assumes that there is no difference between the commodities.
Example
MSR
It can be used when a consumer is allowed to choose between pizzas and shakes. Determine MSR; consumers are requested to give a pizza and shakes that would result in the same satisfaction level. When the combination is graphed, the sloping line will negative. As a result, comer experience determining MRS since the more pizza they have relative to shakes, the fewer shakes they will consume. When the MRS of pizza for shakes is -5, the individual will give up to 5 shakes for additional pizza consumption.
The indifference curve identifies a combination of products that offer the same level of satisfaction to consumers. The consumer gains the exact preference of all combinations. The curve in the above diagram assumes that the consumer is known to the consumer unit of products. It also assumes that good is of the same size and shape and not time gap during consumption. MRS is used to analyze indifference curve
MRS is a great concept that has is used in marginal utility. For instance, MRS focus on balance changes X and Y required by the user to indifferent in consumption before and after the trade. In this condition, indifference means that utility for both goods is equal. There are negative changes concerned by giving Y, and there are positive changes in utility by getting X. The indifferent before and after the trade must equal to 0.the importance of MRS is that even if it is the function to marginal utility, it never changes when positive monotonic transformation functions. The positive monotonic transformation includes those functions that preserve the original order, and it adds constants to utility functions.
The backward bending labor supply curve
The backward bending labor supply curve occurs at a certain point where high wages result in to decline in labor supply. It is witnessed when high salaries encourage the worker to lee and enjoy much of leisure. The substitution effect is on the state that determines the supply of labor where high wages make work to be attractive than leisure. As a result, the high wage increases the supply since work gives excellent remuneration. The income effect indicates that high wages can cause workers to achieve the target income by working for fewer hours.
The backward bending supply concept can be used when individuals have modest demand and seem to be interested in leisure activities. The individual’s goal is to earn a certain amount at the end of the year and then maximize leisure. After the wages above the target amount, the income effect will dominate, and with the presence of high wages, the individual can afford more time off from work. The concept is also used when the consumer has considerable expense accompanied by little interest in leisure. When wages increase, it increases working hours as individuals gain higher income and buy more products.
The backward bending concept has implications on tax policies where the Laffer curve shows a given tax rate, causing tax revenue to increase. Also, low tax rates and high wages cause incentives to expand. The government used the Laffer curve to cut taxes and thus increase revenue. However, when the supply curve is backward bending cut tax doesn’t increase the labor supply. Some employees respond to cut the tax by working less, and this enables them to get the target income by using for fewer hours.
Example
The backward bending labor supply curve is reflected in Canadian lob our market. The research found that wages have positive effects on working hours until the turning point is reached. in the labor market, the turning point is indicated by a negative 10.9 US dollar per hour. Beyond this point, the value of wages has a significant negative impact on working hours. Therefore working hours increaser with wages in a decrease in a decreasing rate; thus, the relation result contributes to a backward bending supply curve for Canadian women. The research also indicates that the substitution effect is more significant to women who lived alone than women married with partners who have earned wages. Young women have a substitution effect, and they respond to high wages by supplying labor. Labor force participation is always higher in men than in women, and the participants indicate that Canadian men have 72.5%, while Canadian females have 62.1%. Gender discrimination is also the cause of backward bending sin women, similar to men who receive few work benefits.
Backward bending concept