Law of Equi- Marginal Utility
(Consumer Equilibrium for more than one commodity.)
A consumer spends his income on many goods & services. How he should distribute his total income among these goods and services, so that he may be in equilibrium. (He attains maximum possible level of utility). Let the prices of two goods A & B be PA & PB respectively.
From law of diminishing M.U. it can be deducted that the consumer is in equilibrium, when the quantity of the commodity is purchased in such a way that M.U. derived from it is equal to the price paid for it multiplied by the marginal utility of money to the consumer.
|MUA = µ PA||————– (1)|
|MUB = µ PB||————– (2)|
|Where µ =||marginal utility of money to the consumer|
If price of good ‘A’ is twice that of good ‘B’ MUA has to be twice MUB. Marginal utilities of all the commodities should be proportional to their respective prices.
From (1) µ = MUA
|\µ = MUA||=MUB|
Thus equilibrium condition can also be stated as :