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Equi-Marginal Principle

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Equi-Marginal Principle

  • This can also be used as a basis for choosing the best combination of two goods that will maximize his or her satisfaction.
  • serve as an avenue for introducing new products in the market
  • The principle of equi-marginal utility explains the behavior of a consumer in distributing his limited income among various goods and services.
  • give more information about the existing products
  • is an extension to the law of diminishing marginal utility
  • This law states that how a consumer allocates his money income between various goods so as to obtain maximum satisfaction.

However, some advertisements do not tell the real quality of the product or service. They are merely devised to attract the consumer to buy the product.

  • Advertisers employ strategies such as color presentation, subliminal messages, or even half-truths to market these products.

THAT IS WHY IT IS VERY IMPORTANT TO BE A WISE CONSUMER.

Under the Equi-Marginal Principle, satisfaction from the consumption of two goods (Commodity A and Commodity B) is maximized under the following condition:

MU of Commodity A MU of Commodity B

______________________ = ______________________

Price of Commodity A Price of Commodity B

The equi-marginal condition is met and the consumer maximize his or her satisfaction from the combined consumption of Commodity A and Commodity B.

The Paradox Of Value

To see the example, please turn your book on page 82.

  • Based on this logic, water should be expensive since it gives the consumer life, and diamond should be cheap since its main use is for decorative purposes.
  • This is what we call the Diamond-Water Paradox or the Paradox of Value: Water which is valuable and gives high utility is cheap while diamond which has little utility is expensive.

The explanation for this lies in the Law of Demand and Supply. Water may be important but its supply is relatively abundant; it can be bought at a cheap price. Diamonds are scarce; difficult to acquire and command a high price.

Consumer Behavior

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