Consumer Equilibrium and the Law of Equi-Marginal Utility :: Business Economics

Consumer Equilibrium and the Law of Equi-Marginal UtilityIntroductionThe Law of Equi-Marginal Utility is an annex to the law of diminishing fringy utility. The principle of equi-marginal utility explains the behavior of a consumer in distributing his limited income among versatile goods and services. This law states that how a consumer everyocates his money income between various goods so as to obtain maximum satisfaction.AssumptionsThe principle of equi-marginal utility is based on the following assumptions(a) The wants of a consumer remain unchanged.(b) He has a fixed income.(c) The prices of all goods are given and known to a consumer.(d) He is one of the many buyers in the sense that he is powerless to alter the market price.(e) He empennage spend his income in small amounts.(f) He acts rationally in the sense that he want maximum satisfaction(g) Utility is measured cardinally. This means that utility, or use of a good, can be expressed in terms of units or utils. This u tility is not only comparable but alike quantifiable. article of beliefSuppose there are two goods x and y on which the consumer has to spend his given income. The consumers behavior is based on two factors(a) Marginal Utilities of goods x and y(b) The prices of goods x and yThe consumer is in counterweight position when marginal utility of money expenditure on each good is the same.The Law of Equi-Marginal Utility states that the consumer will distribute his money income in much(prenominal) a way that the utility derived from the last rupee spent on each good is equal.The consumer will spend his money income in such a way that marginal utility of each good is proportional to its rupee.The consumer is in equilibrium in respect of the purchases of goods x and y whenMUx =MUyWhere MU is Marginal Utility and P equals Price Px PyIf MUx / Px and MUy / Py are not equal and MUx / Px is greater than MUy / Py, then the consumer will substitute good x for good y. As a result the margina l utility of good x will fall.The consumer will continue substituting good x for good y till MUx/Px = MUy/Py where the consumer will be in equilibrium. Thus this is also known as the law of substitution.TableLet us illustrate the law of Equi-Marginal Utility with the help of a tableThe side table shows marginal utilities of goods x and y.