law of equi marginal utility.
{law of substitution)
If a consumer wants to get the most out of his limited resources, he should spend his income on various items in such a way that, The final benefit received from the last rupee spent on each item should be equal to each other.
Everyone wants to get maximum satisfaction from their income That is why at the time of purchase he compares the price of the item and the utility derived from it. If the utility is high then its purchases so, he stops purchasing at this point, Where prices and marginal utility are equal.
Px=MUx
The consumer compare the satisfaction which we obtained from the purchased commodity and the price he paid if the utility of commodity is Greater or at least equal to the loss of utility of money price, the consumer buys that commodity. As he buys more and more of that commodity the utility of successive units being to diminished. He stop further purchased at a point where the marginal utility of the commodity and the marginal utility of the commodity and the money he paid is just equal. Beyond this point the margin utility is negative. And this can be stated as a 'Point of Equilibrium'. Where the consumer drives maximum satisfaction from a given commodity.
With two commodities the consumer is in equilibrium at a point where the marginal utility of each commodity is in proportion to the price and the ratio of the price of all goods is equal to the ratio of their marginal utility it can be mathematically expressed as follows:
MUx = MUy
Px Py
Example.
let's suppose a person has 8 rupees and he wants to purchase X and Y. Prices of X and Y are equal to 1 rupees . He purchased different sets of X and Y.
The marginal utility of different units of X and Y items are described in the following schedule.
units MUx MUy
1 30 24
2 27 21
3 21 18
4 18 15
5 15 12
6 12 9
7 9 6
8 6 3
Diagram:
Explanation:
