Consumer Equilibrium and the Law of Equi-Marginal Utility

804 Words2 Pages
bulb-icon

Recommended: Consumer behavior osu exam.1

Consumer Equilibrium and the Law of Equi-Marginal Utility

Introduction
The Law of Equi-Marginal Utility is an extension to the law of diminishing marginal utility. The principle of equi-marginal utility explains the behavior of a consumer in distributing his limited income among various goods and services. This law states that how a consumer allocates his money income between various goods so as to obtain maximum satisfaction.

Assumptions
The 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 can 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 utility is not only comparable but also quantifiable.

Principle
Suppose there are two goods 'x' and 'y' on which the consumer has to spend his given income. The consumer’s behavior is based on two factors:
(a) Marginal Utilities of goods 'x' and 'y'
(b) The prices of goods 'x' and 'y'
The consumer is in equilibrium 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 such 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' when:
MUx = MUy Where MU is Marginal Utility and P equals Price
Px Py

If 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.

Table
Let us illustrate the law of Equi-Marginal Utility with the help of a table:

The side table shows marginal utilities of goods 'x' and 'y'.

Show More
Related

  • Discussing the Issue of Smoking in Cars

    621 Words  | 2 Pages

    Since various members of society are affected by this negative externality, this next graph displays the surplus between the Equilibrium conditions and the optimum conditions.

    Read More

  • How will a Change in the Interest Rate Change the Future

    814 Words  | 2 Pages

    Generally it is well known in economics that purchasers always want to maximize their utility levels. The maximum utility is given by the formulae of max U = f(C, C’) being subject to the equation of future consumption {[Y – C](1+r) + W = C’ – Y’} . This is an important part for our assumptions since a customer would have problem determining his/her maximum utility for present as well as future consumption when faced with a certain lifetime budget constraint. The budget line represents the levels of consumption for both periods according to some factors such as present and future income as well as the interest rate level and has a slope of –(1+r ). Before considering the effects of a change in the interest rates it is important to understand the first step of the consumption model. In the diagrams A and B below, we can understand that (I) the indifference curves, act on behalf of the equal levels of utility satisfaction derived from different mixtures of present and future consumption. That being said the point (W), which is identified a...

    Read More

  • Human Trafficking

    1095 Words  | 3 Pages

    Human trafficking is the trade in humans, most commonly for the purpose of sexual slavery, forced labor or for the extraction of organs or tissues, including surrogacy . Trafficking is a lucrative industry, representing an estimated $32 billion per year in international trade, compared to the estimated annual $650 billion for all illegal international trade circa 2010. This is one of the fastest growing problems of the world, and if not tackled properly, it will continue to grow at an immense rate. It is mainly described as the movement of children, men, and women illegally across borders for use in various inhumane practices. Human trafficking violates fundamental human rights, and infringes provisions of international law such as the prohibition on slavery and forced labor in Article 4 of the European Convention on Human Rights.

    Read More

  • Aesthetics Should Never Take Precedence Over Function

    1684 Words  | 4 Pages

    From the early Greek temples of yesteryear, to the high-tech autonomous buildings of tomorrow, the question of whether the function of a building or its aesthetics qualities are more important has plagued the minds of architects around the world. Webster's II New College Dictionary (Please do not use the encyclopedia or the dictionary to open your essay--way too high school.) defines aesthetics as "The branch of philosophy that provides a theory of the beautiful and of the fine arts" (18). The definition of Functionalism is defined by Webster's as "The doctrine that the function of an object should determine its design and materials" (453). Now, if the function of an object decides the type of design and materials used how does one integrate aesthetics into design, and moreover, how important are aesthetics to an architect? Frank Lloyd Wright was one of the greatest and most renowned architects of the 19th and 20th centuries, and while his buildings where lauded for displaying great artistic design, the issue of function was compromised by the blatant fact that his roofs leaked. This is because he let the aesthetics of his buildings become the focus of the structure, and neglected to adequately address the function of the building allowing for this problem to take root in his designs (Palermo, 4 Mar. 1999). As is apparent from Frank Lloyd Wright, there is a certain balance that has to be attained between aesthetics and functionalism in order for a structure to be appreciated as a successful building.

    Read More

  • Racism and Cultural Differences Exposed in Othello

    1328 Words  | 3 Pages

    Othello, from the onset, is shown to us a play of love and jealousy. There is however more to this play than just love and jealousy; there is underlying racism, hate, deception, pride, and even sexism between these pages. Othello is a transcendent play, one that will survive the perils of time simply because it is still relevant. Even today, over 400 years later, there are still issues of racism and sexism. Hate is as natural as love in humans and Othello gets right to the root of that. We witness this from the very first scene, “…you’ll have your daughter covered with a Barbary horse/ you’ll have your nephews neigh to you” (I.i.112-14); to the very last, “Moor she was chaste. She loved thee, cruel Moor” (V.ii.258). Moor however is used as an insult all throughout the play; not so much the word itself but the feel of the word. Between these pages we see many different ways as to how the cultural differences between Othello and the other characters.

    Read More

  • Marginal Analysis Essay

    716 Words  | 2 Pages

    “Marginal analysis involves changing the value(s) of the choice variable(s) by a small amount to see if the objective function can be further increased (in the case of maximization problems) or further decreased (in the case of minimization problems)” (Thomas & Maurice, 2012, pp. 91). Marginal analysis is known as “the central organizing principle of economic theory” for its importance and applicability to many aspects of our daily lives as well as our careers (Thomas & Maurice, 2012, pp. 94). The key concepts of marginal analysis include total benefit, total cost, marginal benefit, marginal cost and net benefit. These concepts all come together to play a significant role in the use of marginal analysis to reach the optimal desired outcome.

    Read More

  • Rational Consumer Behavior Model Essay

    986 Words  | 2 Pages

    The rational consumer behavior model is founded on four assumptions: diminishing marginal utility, non-satiation, free disposal, and whole-income usage. Diminishing marginal utility suggests that added happiness, given by each additional unit, decreases. Added utility can never reach zero based on the assumption that our desires for a good are non-satiable, or that more is better. Free disposal states that no amount of a good can be considered too much logistically. Lastly, it is assumed that

    Read More

  • What Way Would A Modern Audience React To The Way Race And Racism Is Portrayed In 'Othello'?

    1719 Words  | 4 Pages

    In the Sixteenth century, as we see clearly from Othello and other works of both Shakespeare and Cinthio's original version of Othello, race was a topic of great debate and discussion. Today, in the twenty-first century the debate retains its controversy and passion. However, attitudes towards race have taken a dramatic turn during the last century. In the developed world people are now living in an increasingly cosmopolitan society would undoubtedly be more tolerant and would reject or even be offended by racial discrimination to any person or sections of the community. Openly 'racist' people today are seen as outcasts. Taking this into account, the way a modern audience would react to race and racism in Othello is dependent upon the way in which that modern audience would interpret 'Othello'. This prompts the questions of what sort of message Shakespeare wanted to send to his audience and was Othello the moor portrayed as a tragic hero or did his character eventually come to resemble the prejudices of which he was a victim. Shakespeare also discusses the issue of race with other characters such as the hateful Iago and the prejudices hidden deep in Barbantio.

    Read More

  • Analysis Of Le Corbusier's Vers Une Architecture

    1348 Words  | 3 Pages

    Le Corbusier’s Vers Une Architecture (Towards a New Architecture) is focused on the architectural qualities of “the machine”. He states that “the house is a machine for living in,” where the principles of architects should be to make the house suited for its purpose, as if it was a machine. This restates the argument that functionalism is more important than appearance, and that progress comes from architects abandoning the concept of traditional styles and decorative effects. Le Corbusier understood that architecture has nothing to do with various styles because functionality will always come before the subjectivity of appearance; he saw the aesthetic, not as just another style but the substance of architecture. In which he drew parallels

    Read More

  • Architecture of the New Capitalist Society

    1727 Words  | 4 Pages

    Architecture has been known as the product of aesthetics, structure, and function that serves to address social needs, resolve environmental and humanitarian problems through built form. Architecture not only shelters, but also has the ability to consolidate boundaries within our society. It realizes the role by physically defining space and by imposing its symbolic, representative meaning onto our living environment. As Ludwig Wittgenstein once said, “Architecture immortalizes and glorifies something”. Indeed, architecture must be documentary and didac...

    Read More

  • Ethics In The Spotlight Movie

    927 Words  | 2 Pages

    In his context, utility is used to mean “whatever produces pleasure or happiness, and whatever prevents pain or suffering” (p. 34). His premise states that the course of action taken should be the one that “maximizes utility” (p. 34). On a superficial level, this seems to make intuitive sense, people want to do what makes them happy. However, there are some substantial flaws in his logic, namely the concept of individual rights and the concept of value (p. 40). This premise negates the importance of human rights, naturally gained rights, that can no one can take away. His logic dictates that if a majority of people will be happy, it would be okay to violate the rights of a single being. His skewed viewing of the world negates the concept of

    Read More

  • Supply And Demand

    1824 Words  | 4 Pages

    The market price of a good is determined by both the supply and demand for it. In the world today supply and demand is perhaps one of the most fundamental principles that exists for economics and the backbone of a market economy. Supply is represented by how much the market can offer. The quantity supplied refers to the amount of a certain good that producers are willing to supply for a certain demand price. What determines this interconnection is how much of a good or service is supplied to the market or otherwise known as the supply relationship or supply schedule which is graphically represented by the supply curve. In demand the schedule is depicted graphically as the demand curve which represents the amount of goods that buyers are willing and able to purchase at various prices, assuming all other non-price factors remain the same. The demand curve is almost always represented as downwards-sloping, meaning that as price decreases, consumers will buy more of the good. Just as the supply curves reflect marginal cost curves, demand curves can be described as marginal utility curves. The main determinants of individual demand are the price of the good, level of income, personal tastes, the population, government policies, the price of substitute goods, and the price of complementary goods.

    Read More

  • Demand And Demand Essay

    733 Words  | 2 Pages

    In economics, one particular arresting feature is the price effect on demand and supply. With the aim of making commodity and service market balance, demand and supply should tend to be balanced. That is economic equilibrium. Market equilibrium is the situation where quantity supplied and quantity demanded of a specific commodity are equal at the certain price level. As the diagram shows below, at price1 quantity supplied is more than quantity demanded, a surplus occurs. That means producers cannot sell all the products because of the small demand of market. Then price will start to fall. At price 2, quantity demanded is more than quantity supplied, a shortage occurs. In this situation, more products will be made because producers have pursuit

    Read More

  • Why Study Economics Essay

    1241 Words  | 3 Pages

    There are two reasons help us to answer this question. Firstly, as it mentioned above, economics could provide supports to help people make right decisions. Everyone have to make a considerable amount of decisions in life and work, no matter they are politicians or housewives. For example, a wise politician makes use of economics theory to make economic decisions in order to run the country well and bringing prosperities to people. A smart housewife knows that breads’ and vegetables’ prices are economical in the afternoon under economics’ guidance. Some common rules hide incredible economics theories people might never notice because it seems so simple in the normal life. If we known these theories, we can take advantages of it to make right decisions at vital moment. Secondly, economics, as one of the most important subjects in academic circle, playing a significant role and affecting many aspects of our life. Before I study economics, I found many strange things whereas I can not explain by using common sense. For example, why are diamonds so much more expensive than water even thought water has vital importance to human existence than diamonds? Why does government levy taxes on merchandises to increase citizens’ financial burden? Why does the fast food restaurant drink can be refilled for free? After I learned the marginal cost and

    Read More

  • I Want to Pursue a Career in Economics

    516 Words  | 2 Pages

    In today's world, economics associated disciplines are of fundamental significance and application and this has encouraged me to pursue a degree in Economics. Economics has an important relevance in all of our lives. As consumers we try to make the best of our limited incomes. As workers we take our place in the job market. As citizens of a country our lives are affected by the decisions of our government: decisions over taxes, decisions over spending on health and education, decisions on interest rates, decisions that affect unemployment, inflation and growth. As dwellers on the planet Earth we are affected by the economic decisions of each other: the air we breathe, the water we drink and the environment we leave for future generations are all affected by the economic decisions taken by the human race. It is these stimulating issues that excite me about economics. I enjoy studying Economics enormously and believe my passionate interest in economics is continually strengthened by my regular reading of 'The Economist'

    Read More

More about Consumer Equilibrium and the Law of Equi-Marginal Utility

Open Document