Law of Equi Marginal Utility

The law of equi marginal utility is an important concept in the field of economics. It states that for a rational consumer, the marginal utility that is derived from each additional unit of a good or service consumed will be equal, as long as all other factors remain constant.

Explanation

This concept is based on the assumption that consumers will always attempt to maximize their satisfaction or utility from a given set of resources. In order to do this, they will allocate their resources in a way that maximizes the total utility derived from each unit of the resource.

To understand this concept better, consider the following example. Suppose a person has $10 to spend on either apples or oranges. The marginal utility of the first apple is 10, while the marginal utility of the first orange is 8. This means that the person will choose to buy the apple, as it provides more satisfaction for the same amount of money.

However, as the person continues to consume more apples, the marginal utility of each additional apple will decrease. Eventually, the marginal utility of the last apple consumed will be equal to the marginal utility of the last orange consumed. At this point, the person will be indifferent between buying an additional apple or an additional orange.

Implications

The law of equi marginal utility has several important implications for businesses and consumers alike. For businesses, it suggests that they can maximize profits by producing goods and services up to the point where the marginal cost of production is equal to the marginal revenue generated by the last unit sold.

For consumers, the law of equi marginal utility suggests that they can maximize their satisfaction by allocating their resources in a way that equalizes the marginal utility derived from each unit of the resource.

In conclusion, the law of equi marginal utility is a key concept in economics that helps to explain how consumers and businesses allocate their resources in a way that maximizes satisfaction and profits, respectively.