Economics Marginal Utility Questions Long
Marginal utility theory explains the concept of consumer equilibrium by analyzing the relationship between the marginal utility derived from consuming additional units of a good and the price or cost of obtaining those units. Consumer equilibrium occurs when a consumer maximizes their total utility or satisfaction given their limited budget.
According to marginal utility theory, the law of diminishing marginal utility states that as a consumer consumes more units of a good, the additional satisfaction or utility derived from each additional unit decreases. This means that the consumer is willing to pay less for each additional unit of the good.
On the other hand, the price or cost of obtaining each unit of the good remains constant or may increase due to factors such as scarcity or production costs. As the consumer continues to consume more units, the marginal utility derived from each additional unit decreases while the price or cost remains constant or increases.
Consumer equilibrium is achieved when the consumer allocates their limited budget in such a way that the marginal utility per dollar spent is equal across all goods consumed. In other words, the consumer maximizes their satisfaction by spending their money on goods in a way that the additional utility gained from the last dollar spent on each good is the same.
To illustrate this concept, let's consider a consumer who has a limited budget to spend on two goods, A and B. The consumer's marginal utility from consuming additional units of good A decreases faster than the marginal utility from consuming additional units of good B. However, the price of good A is lower than the price of good B.
Initially, the consumer will allocate more of their budget towards purchasing good A because the marginal utility per dollar spent is higher compared to good B. As the consumer continues to consume more units of good A, the marginal utility derived from each additional unit decreases, and the consumer will start allocating more of their budget towards purchasing good B, where the marginal utility per dollar spent is higher.
Consumer equilibrium is achieved when the consumer reaches a point where the marginal utility per dollar spent is equal for both goods. At this point, the consumer cannot increase their total utility by reallocating their budget between the two goods.
In summary, marginal utility theory explains consumer equilibrium by analyzing the relationship between the diminishing marginal utility derived from consuming additional units of a good and the price or cost of obtaining those units. Consumer equilibrium occurs when the consumer maximizes their satisfaction by allocating their limited budget in a way that the marginal utility per dollar spent is equal across all goods consumed.