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

Consumer Equilibrium and the Law of Equi-Marginal public-service corporationIntroductionThe Law of Equi-Marginal public utility is an extension to the law of diminishing marginal expediency. The rationale of equi-marginal utility explains the manner of a consumer in distributing his limited income among various replete(p)s and services. This law states that how a consumer allocates his currency income between various reasoneds so as to obtain supreme 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 helpless to alter the market price.(e) He can spend his income in micro amounts.(f) He acts rationally in the sense that he want maximum satisfaction(g) return is measured cardinally. This means that utility, or use of a good, can be expr essed in terms of units or utils. This utility is not only comparable but also quantifiable.Principle calculate 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 symmetry position when marginal utility of money expenditure on each good is the same.The Law of Equi-Marginal Utility states that the consumer result distribute his money income in such a way that the utility derived from the last rupee spend on each good is couple.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 marginal 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.