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……….

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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