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The Law of EquiMarginal Utility

The document discusses the Law of Equi-Marginal Utility, which explains how consumers allocate a limited income between different goods to maximize satisfaction. It states that consumers will be in equilibrium when the marginal utility per unit of expenditure is equal between goods, allowing the consumer to substitute goods until this equality is reached. The law makes assumptions such as fixed wants and income, known prices, and cardinal measurability of utility.

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918 views14 pages

The Law of EquiMarginal Utility

The document discusses the Law of Equi-Marginal Utility, which explains how consumers allocate a limited income between different goods to maximize satisfaction. It states that consumers will be in equilibrium when the marginal utility per unit of expenditure is equal between goods, allowing the consumer to substitute goods until this equality is reached. The law makes assumptions such as fixed wants and income, known prices, and cardinal measurability of utility.

Uploaded by

naveenshukla46
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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The Law of Equi-Marginal Utility ………

The Law of Equi-Marginal Utility……….

An extension
to the law of
diminishing
marginal
utility.
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……….

Assumptions
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……….

Consider two goods


Consumer Behaviour ‘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 MUx = MUy


equilibrium in
respect of the MU refers to Marginal
purchases of goods Utility
'x' and 'y' when:
The Law of Equi-Marginal Utility……….

If MUx/Px & MUy/Py  the consumer will


are not equal substitute good 'x'
for good 'y'.
&  the marginal utility
of good 'x' will fall
If MUx/Px > MUy/Py

P refers to price
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 Helpful to
consumers producers

to obtain maximum to get maximum


satisfaction profits

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