Explain what is meant by a consumer's equilibrium and how it is related to the demand for a product.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2019). The mark or mark type is shown in brackets.

1. [12] Equilibrium is a relationship between the marginal utility and the price; can be explained using either marginal utility or indifference curves – marginal rate of substitution equal to the price ratio.
2. [12] Consideration of the assumptions: rationality, sovereignty, the ability to measure utility, the relationship between utility and price.
3. [12] Link between price and demand.
4. [13] Analysis of the difference between income and substitution effects and the overall effect on demand of a change in price.
5. [13] Whether demand will increase, and by how much for a price fall depends on the classification of the good but also on the price elasticity of demand.
6. [13] The company would also need to know if it increased production how that would affect costs – and thus profits.