the law of equi-marginal utility ………. the law of equi-marginal utility………. an extension...
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The Law of Equi-Marginal Utility………
Explains :
the behavior of a consumer in distributing his limited income among various goods and services
The Law of Equi-Marginal Utility……….
States :
how a consumer allocates his money income between various goods so as to obtain maximum satisfaction.
The Law of Equi-Marginal Utility……….
The wants of a consumer remain unchanged.
He has a fixed income. The prices of all goods are given and known
to a consumer. He is one of the many buyers in the sense
that he is powerless to alter the market price.
He can spend his income in small amounts
The Law of Equi-Marginal Utility……….
He acts rationally in the sense that he want maximum satisfaction
Utility is measured cardinally.
The Law of Equi-Marginal Utility……….
Consumer Behaviour Consider two goods
‘x’ and ‘y’ on which the consumer has to spend his given
income
The Law of Equi-Marginal Utility……….
The consumer’s behavior is based on two factors:
Marginal Utilities of goods 'x' and 'y'
The prices of goods 'x' and 'y'
The Law of Equi-Marginal Utility……….
The consumer is in equilibrium in respect of the purchases of goods 'x' and 'y' when:
MUx = MUy
MU refers to Marginal Utility
The Law of Equi-Marginal Utility……….
If MUx/Px & MUy/Py
are not equal
&
If MUx/Px > MUy/Py
P refers to price
the consumer will substitute good 'x' for good 'y'.
the marginal utility of good 'x' will fall
The Law of Equi-Marginal Utility……….
The consumer will continue substituting good 'x' for good 'y' till MUx/Px = MUy/Py where the consumer will be in equilibrium
also known as the law of substitution
The Law of Equi-Marginal Utility……….
Limitations:
Assumption that utility can be cardinally measurable.
Assumption that marginal utility of money is constant.
Not applicable in the case of indivisible goods like TV sets, refrigerators, etc
The Law of Equi-Marginal Utility……….
Useful to consumers
to obtain maximum satisfaction
Helpful to producers
to get maximum profits
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