Consumer Equilibrium and Price Changes: How Does it Affect Your Spending?
How does a change in the price of goods affect consumer equilibrium?
Suppose you normally buy coffee and croissants for breakfast. You are currently in consumer equilibrium. Now, if the price of croissants suddenly increases, what impact will it have on your budget constraint and utility?
Answer:
An increase in the price of croissants would effectively shift your budget constraint to the left, leading to a reduction in the level of utility you derive from the same combination of coffee and croissants. The quantity demanded for each good will be influenced by your personal preferences.
Consumer equilibrium refers to the point where a consumer maximizes their utility while staying within their budget constraint. When the price of a good, such as croissants in this case, increases, it impacts the consumer's ability to afford the same quantity of goods as before.
With the price increase, your budget constraint shifts, causing it to intersect with a lower indifference curve. This means that the level of satisfaction or happiness you derive from your breakfast choices decreases due to the higher price of croissants.
As a result, you may end up purchasing fewer croissants and possibly adjusting your consumption pattern by buying more coffee or exploring alternative breakfast options. The extent of this shift in demand will differ based on your individual preferences and the importance you place on croissants in your breakfast routine.