Consumer expenditure and equi marginal utility

The Classical Theory of Employment and Output! Classical economists such as Adam Smith and Ricardo maintained that the growth of income and employment depends on the growth of the stock of fixed capital and inventories of wage goods. But, in the short ran, the stock of fixed capital and wage goods inventories are given and constant.

Consumer expenditure and equi marginal utility

She can spend this money in three ways. Some amount may be spent on the purchase of chocolates and some on the purchase of ice creams. In order to make the best of the limited resources, she adjusts her expenditure. When the marginal utilities of the two commodities are equalized, the total utility is then maximum i.

The law of equi-marginal utility can be explained with the help the diagrams. In the diagram, MU is the marginal utility curve for chocolates and KL of ice creams. The loss in utility chocolates is greater than that of its gain in ice creams. It is true that Consumer expenditure and equi marginal utility is irrational sometimes.

It is behavior is greatly influenced by habits, advertisements etc. Critics point out that utility is an abstract term, which cannot be measured.

Utility is subjective and psychological concept. It is difficult to measure. Marginal Utility of Money is not constant: Marshall assumes that marginal utility of money is constant but Hicks argues that money is also a commodity and the marginal utility also diminishes slowly.

Consumer is not a computer: Multiplicity of commodities prevent the consumer from making a rational choice. He neither has time nor the ability to calculate marginal utilities.

Consumer Expenditure and Equi-Marginal Utility | Essay Example

It is not applicable to indivisible goods. If divided they will lose their utility. It is difficult to measure the utility in respect of durable goods such as car and machinery. For example; if the consumer purchases a refrigerator and a cup of coffee, it is very difficult to equalize the Marginal Utility of a refrigerator which lasts for several years with a cup of coffee, which exhausts at the single act of consumption.

Indefiniteness of budget period: The income may be daily, monthly or yearly. Even if we assume that budget period is one year, it is very difficult to calculate the utilities as he purchases various commodities.

Customs, fashions, ignorance, scarcity etc.: Customs make the consumption of an article compulsory irrespective of marginal utilities. Fashion of the day impede the operation of the law as one may purchase a commodity much against his wish to be in tune with the fashion.

Consumer does not possess complete knowledge of all commodities and their prices in the market.

Consumer expenditure and equi marginal utility

Moreover prices are subject to change. Scarcity consumer is compelled to purchase an alternative or a substitute good if there is scarcity. Some of the areas, where it could be used are: The expenditure pattern of every consumer is based on this law. The consumer distributes his limited income among various commodities in such a way that the Marginal Utility or the satisfaction that he gets is equal to its price.

At that point he stops further consumption, because he knows that if he continues consumption, the satisfaction will be less and the price he is going to pay is more.

This helps the consumer to maximise his satisfaction. Choice between Savings and Consumption: If the future consumption yields more satisfaction than the present consumption, in that case the consumer will decide to save his income rather than spending it. The theory of production: The law helps the producer to maximise his profits by substituting one factor of production to another till the marginal productivity of all the factors are equalised.

The theory of public finance: The objective of public finance is to achieve maximum social advantage. The society gets the maximum economic benefit at the point where the sacrifice made by people on account of paying taxes is exactly equal to the benefits that they get from the government.

Thus the law has very wide application.Introduction of TOPIC. Consumer behaviour theory tries to explain the relationship between price changes and consumer demand. Utility is a concept used to denote the subjective satisfaction or usefulness attained from consuming goods and services.

The law of equi marginal utility is an extension of the law of diminishing marginal utility. The consumer can get maximum utility by allocating income among commodities in such a way that last dollar spent on each item provides the same marginal utility.

The Law of Equi-Marginal Utility is an extension to the law of diminishing marginal utility. The principle of equi-marginal utility explains the behavior of a consumer in distributing his limited income among various goods and services.

metin2sell.com (General) (CBCS). Faculty of Commerce, O.U 3 THIRD YEAR: SEMESTER-V BC Practice of General Insurance SEC-3 2 2. Consumer Expenditure and Equi-marginal Utility Consumer behaviour theory tries to explain the relationship between price changes and consumer demand.

Utility is a concept used to denote the subjective satisfaction or usefulness attained from . The Classical Theory of Employment and Output!

Classical economists such as Adam Smith and Ricardo maintained that the growth of income and employment depends on the growth of the stock of fixed capital and inventories of wage goods.

But, in the short ran, the .

The Classical Theory of Employment and Output (Explained With Diagram)