ECON 1001 Lecture Notes - Lecture 14: Substitute Good, Marginal Utility, Economic Equilibrium
Document Summary
In this model the fundamental condition of consumer"s equilibrium is the principle of equi- marginal utility. The principle of marginal utility implies that the consumer should incur expenditure on different commodity in such a manner that marginal utility of last rupee spent on each one of them is equal. Suppose there are two commodity x and y. Marginal utility of x and y commodity are given in the table below. In order to have maximum utility consumer will purchase 6 units of x any 4 units of y because it satisfies the following two conditions required for consumers equilibrium. At 6 units of x = mux/px = 5. At 4 units of y muy/py = 15/3 =5. The consumer would buy 6 units of x and 4 units of y and derive maximum satisfaction. Thus in the equilibrium position where he maximizes his utility mux/px = muy/py = mum.
