Equilibrium means a state of rest — no change, maximum benefit. When a consumer buys goods, they pay a price; as they consume more, utility decreases due to the Law of Diminishing Marginal Utility; and their income also gets used up with each purchase. A rational consumer therefore tries to balance their expenditure in such a way that they attain maximum satisfaction with minimum expenditure.

Consumer equilibrium can be studied in two situations:

• Single Commodity: Consumer consumes only one good
• Two Commodities: Consumer consumes two goods (general case)

When a consumer buys only one commodity, two factors determine equilibrium:

• Price of the commodity
• Expected utility (MU) from each unit

The consumer will be at equilibrium when:

In reality, a consumer buys multiple commodities. The equilibrium condition extends to the Law of Equi-Marginal Utility — also known as:

Two conditions must be satisfied for equilibrium:

1. Equi-Marginal Condition: The ratio of MU to price must be equal for all commodities, and equal to the marginal utility of money.
2. MU falls as consumption increases: The Law of DMU must hold — equilibrium is achieved on the falling portion of the MU curve for each good.

The cardinal utility approach assumes that satisfaction can be measured in exact numerical units called “utils” (1 util, 2 utils, etc.). But in reality, utility is a psychological and subjective concept — there is no instrument or scale that can objectively measure how much a person likes something. This is the most fundamental criticism of the cardinal approach, which led to the development of the ordinal utility approach (indifference curve analysis) by Hicks and Allen.