The equi-marginal principle explains how a rational consumer with a limited budget chooses to spend their money. To get the most satisfaction (utility), a consumer should distribute their spending so that the marginal utility—the extra benefit—gained from the last dollar spent on each good is exactly the same.
Key Points:
- Consumers have limited income but many wants, requiring careful choices.
- A consumer should keep spending on a specific product as long as its utility per dollar is higher than other options.
- When the utility per dollar spent is equal across every product, the consumer has reached equilibrium, meaning they cannot change their spending to feel any better off.
Formula:
Total satisfaction is highest when:
where MU is marginal utility and P is price.
Simple Example:
If a slice of pizza costs £2 and gives 16 utils, and a book costs £1 and gives 8 utils, both provide 8 utils per £1. Because these values are equal, the consumer is spending their money in the most efficient way possible to gain maximum total satisfaction.