Why consumers equalise marginal utility per naira

Lesson notes

Key points

• Marginal utility is the extra satisfaction a consumer gets from one more unit of a good, and it usually diminishes.
• A rational consumer with a fixed budget maximises utility when marginal utility per naira is equal across all goods.
• If bread gives more utility per naira than suya, buying more bread and less suya raises total utility until the ratios match.
• In indifference curve terms, this is the tangency where the marginal rate of substitution equals the price ratio.

Definitions

Marginal utility (MU)

The change in total utility from consuming one additional unit of a good.

Takeaway: Optimum: MU per naira equal across goods, MRS equals price ratio.

Marginal utilityEquimarginal principleReallocationMRS = Px/Py