Law of equi marginal utility

1. LAW OF EQUI-
MARGINAL UTILITY

2. 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.

3. 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…

4. CONTINUE….
ASSUMPTIONS:
1. UTILITIES ARE INDEPENDENT
2. MARGINAL UTILITY OF MONEY
REMAINS CONSTANT.
3. UTILITY IS CARDINAL.
4. CONSUMER IS RATIONAL.

5. 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.

6. 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.

7. 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

8. LIMITATIONS..
1. UTILITY IS IMMEASURABLE.
2. INDIVISIBLE GOODS
3. PRICES AND TASTES ARE
CHANGING.
4. TIME FACTOR.