Professional Documents
Culture Documents
Definition
When we pay a certain price for a commodity it can be taken for granted that we think that the satisfaction is at least equal to the price paid. Hence we say they the price paid measures the marginal utility to that marginal utility indicates price. They move together. If the price goes up, the marginal utility also goes up, because now we buy less and vice versa. Marginal utility does not determine or governs price. It simply indicates it.
Example
Suppose our hypothetical consumer has a given amount of income to spend and wants to maximize his satisfaction. We further assume that the commodities are subject to law of diminishing utility. He feels that he will aim greater satisfaction if he spends on any other good. Thus he goes on substituting one thing for another until the whole of the money is exhausted. When this is done he has got equi marginal utility. He cannot now increase his total utility by spending more on one thing and less on the other. The law can be easily understood with the help of a hypothetical example. It is assumed that our consumer has only rupees 8 with which he purchases two comities say apple and bananas.