Definition
Equi-marginal principle: a consumer maximises total utility from a fixed budget when the marginal utility per £ spent is equal across all goods bought.
Consumer equilibrium: the allocation of a budget at which no reallocation of spending can raise total utility.
The idea is to chase value for money at the margin, moving the last £ to wherever it buys the most satisfaction.
The condition
Equilibrium condition:
MUaPa=MUbPb \dfrac{MU_a}{P_a} = \dfrac{MU_b}{P_b} PaMUa=PbMUb- Each good gives some marginal utility for its price.
- The consumer compares the satisfaction gained per £1 spent on each good.
- Spending shifts towards the good with more utility per £1, because that £ buys more satisfaction.
- Equilibrium is reached when the MU ÷ P ratios are equal, so no switch can add utility.
Example
- With a £50 budget, good A costs £2 and gives 20 utils; good B costs £1 and gives 15 utils.
- B delivers 15 utils per £1 against A's 10, so shifting the next £ from A to B raises total utility.
- Buying more B lowers its marginal utility and buying less A raises A's, say to MUa = 24 and MUb = 12.
- Now both goods yield 12 utils per £1, the ratios match and no further gain is possible.
Reaching equilibrium
- Buying more of a good lowers its marginal utility, by diminishing marginal utility.
- So its utility per £1 falls, narrowing the gap with other goods.
- Spending keeps shifting until no reallocation can raise total utility.
- That balance point is the consumer's equilibrium.
Note
- A shopper switches spending towards whatever gives more satisfaction per £1.
- As they buy more of it, its marginal utility falls.
- So they settle where the MU ÷ P ratios match.
When a price changes
- A price change alters the marginal utility per £1 for that good.
- The MU ÷ P ratios are no longer equal.
- The consumer reallocates spending to restore the balance.
- So a price change moves the consumer to a new equilibrium, which is the basis of the demand curve.
Exam technique
- State the condition as MU ÷ P being equal across goods.
- Work an example showing which good to buy more of, then check the ratios end equal.
- Explain how a price change prompts reallocation.
Common Mistake
- Do not set the marginal utilities themselves equal across goods.
- It is marginal utility ÷ price (MU/P) that must be equal.
Self review
- What does the equi-marginal principle state?
- Write down the equilibrium condition.
- If a good gives more utility per £1, what does the consumer do?
- Why does buying more of a good restore balance?
- What happens when a price changes?
