Consumer's Equilibrium - Basic

In order to get the fair idea about this topic we need to understand some basic things associated with this topic.

Marginal Utility of a good -: It is always diminishing. Law of diminishing MU will operate. This law states when a consumer consumes more and more amount of a good, he derives less and less satisfaction from the consumption of successive units.

Marginal Utility of Money -: This is assumed to be constant. If a consumer gets satisfaction worth 4 utils from one rupee, he will get satisfaction worth 400 utils from Rs 100/-.

Marginal Utility of a good in terms of Money  (MUx tm)-: This is the ratio of Marginal utility of a good to MU of money. It is just conversion of Marginal utility of a good in to  money. It means how much money is required to buy the given utility.

Suppose Utility of one rupee = 4 utils

Suppose a consumer is consuming a chocolate and getting satisfaction equals to 100 utils. Then utility of how much money is equal to 100 utils. off course  rupees 25/-

MUxtm = MUx/MUm

= 100/4 = 25/-

Where MUx is marginal utility of a good x
MUm is marginal utility of money
MUxtm is marginal utility of a good in terms of money.


Utility per Ruppee -:  It is the ratio of Marginal Utility of a good to price of that good.

  Utility per rupee = MUx/ Px
Where MUx is marginal utility of a good x
Px is price of good x.