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Equi-Marginal Principle and Utility Limits

The document discusses the concept of utility, including total and marginal utility, and the law of diminishing marginal utility. It explains the equi-marginal principle, which describes consumer equilibrium in maximizing total utility, and how marginal utility helps derive an individual's demand curve. Additionally, it outlines the limitations of marginal utility theory, emphasizing that consumer behavior is influenced by factors beyond just utility.

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11 views6 pages

Equi-Marginal Principle and Utility Limits

The document discusses the concept of utility, including total and marginal utility, and the law of diminishing marginal utility. It explains the equi-marginal principle, which describes consumer equilibrium in maximizing total utility, and how marginal utility helps derive an individual's demand curve. Additionally, it outlines the limitations of marginal utility theory, emphasizing that consumer behavior is influenced by factors beyond just utility.

Uploaded by

tamutandiro
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd

Chapter 30: Utility

UTILITY AND DIMINISHING MARGINAL UTILITY, THE EQUI-


MARGINAL PRINCIPLE, DERIVATION OF AN INDIVIDUAL DEMAND
CURVE AND LIMITATIONS OF MARGINAL UTILITY THEORY
Utility and Diminishing Marginal
Utility
Utility- Utility is the measure of the level of happiness or satisfaction someone derives from the
consumption of a good or service.
It is assumed that utility can be measured in units, the same way goods consumed can be
determined.
Measures of satisfaction:
1) Total utility- the overall satisfaction derived from the consumption of all units of good over a
period of time
2) Marginal utility- the additional utility derived from consuming one more unit of a particular
good.
Law of Diminishing Marginal Utility suggests that “as consumption of goods~increases, the
marginal utility will get smaller”
Equi-Marginal principle
The equi-marginal principle: A consumer is said to be in equilibrium when it is not possible to switch expenditure
from good A to good B to increase total utility.
MU/P for Good A = MU/P for Good B= MU/P for Good C…
MU= marginal utility
P= price for goods
A, B, C = different products
In this case, the consumer has allocated income in a way that maximizes total utility, resulting in consumer
equilibrium.
The equi-marginal principle is based on these assumptions:
1) The consumer has limited income
2) The consumer will always behave rationally
3) The consumer seeks to maximize their utility
Derivation of an individual demand
curve

Marginal Utility can be used to explain how an


individual’s demand curve is derived.
As the price of a good decreases, the consumer’s
purchasing power increases, which increases the
utility derived from the consumption of the good.
Limitations of Marginal Utility Theory and
Assumptions of Rational Behavior
Limitations of the Marginal Utility Theory:
1) It assumes that consumers can put their wants in rank order
2) It assumes that consumers can assign a value for the satisfaction derived
from the consumption of a good
3) It assumes that consumers behave rationally when it comes to
purchasing decisions
In the real world, utility isn’t the only factor that influences what a consumer purchases, there are
other factors that we must consider.
Exercises

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