LAW OF EQUI-MARGINAL

UTILITY

LAW OF EQUI-MARGINAL UTILITY

THE LAW OF EQUI-MARGINAL UTILITY IS THE FURTHER ELABORATION OF THE LAW OF DIMINISHING MARGINAL UTILITY.

IT IS ALSO KNOWN AS THE LAW OF SUBSTITUTION AND THE LAW OF MAXIMIZATION OF SATISFACTION.

CONTINUE….

“THE HOUSE HOLDS MAXIMIZING THE UTILITY WILL SO ALLOCATE THE EXPENDITURE BETWEEN COMMODITIES THAT THE UTILITY OF THE LAST RUPEE SPENT ON EACH ITEM IS EQUAL.”

FORMULA FOR CONSUMER’S EQUILIBRIUM…

MUA/PA = MUB/PB = ….= MUN/PN

CONTINUE….

ASSUMPTIONS:

1. UTILITIES ARE INDEPENDENT

2. MARGINAL UTILITY OF MONEY REMAINS CONSTANT.

3. UTILITY IS CARDINAL.

4. CONSUMER IS RATIONAL.

Managerial Uses of Price Elasticity of Demand

1. Determination of price under Monopoly.

2. Basis of Price discrimination.3. Price determination of Joint

Products.4. Determination of prices of public

utilities.5. International Trade.6. Effect on Employment.

EXPLANATION

WE ASSUME THAT:

1. THE CONSUMER HAS RS.5 WITH HIM.

2. HE HAS TO SPEND HIS INCOME ON TWO GOODS A AND B.

3. THE PRICE OF EACH GOOD IS RS.1 PER UNIT.

TABLE…

Units of money

MU of A MU of B

1 12 10

2 10 8

3 8 6

4 6 4

5 3 2

Total 39 30

LIMITATIONS..

1. UTILITY IS IMMEASURABLE.

2. INDIVISIBLE GOODS

3. PRICES AND TASTES ARE CHANGING.

4. TIME FACTOR.