Question
Explain the relationship between $MU$ and Price.
✓
Answer
The relationship between MU \& Price helps to understand, how the law of DMU forms 'the basis of law of demand. It is a perfect example of application of law of DMU practically. In this case, MU is converted in terms of money to understand this relationship and the comparison between MU \& price.Let us assume that 1 unit of MU = ₹ 10/Market price per unit of commodity $x=₹ 50 /-$ The table given below, explains the relationship between MU and price. It helps to know consumers equilibriumThe above given table indicates that a consumer purchase units of commodity ' $x$ ' one after another. 2nd column shows MU derived from each unit. It goes on diminishing with every unit of commodity consumed.
To compare MU with price, it is necessary to ) convert MU in terms of money.
Let us assume that, 1 unit of $MU =₹ 10 /-$ So, units of MU multiplied by $₹ 10 /-$ (as shown in column
Market price of each unit of commodity ' $x$ ' is ₹ $50 /-$ (as shown in column 4)
Column 5 shows comparison between MU and price.
It is observed that, for the first and second unit, MU (in terms of money) is greater than the price paid for them it means $MU _{ x }> P _{ x }$.
So, a rational consumer will be willing to buy 1 st and 2 nd unit of commodity ' $x$ '.
At the 3rd unit a commodity ' $x$ ' MU equals ) the price. So, the consumer can also think of purchasing it. Here, $MU _{ x }=$ $P_x$
But, in case of 4th and 5th unit, MU is less than price. Therefore, a rational consumer will not purchase these units because $MU _{ x }< P _{ x }$
The relationship between MU and price can be summarised as follows:
1. When MU is greater than price, a consumer is willing to buy those units. They are called Intra- Marginal units ( $MU _{ x }$ $>P_x$ ).
2. When MU becomes equal to market price, a consumer can also think of buying that unit. It is called Marginal unit $\left( MU _{ x }= P _{ x }=\right.$ Consumer's equilibrium).
3. When MU is less than price, a rational consumer is not willing to buy them. They are called Extra-marginal units $\left( MU _{ x }< P _{ x }\right)$ Thus, a rational consumer attains equilibrium where $MU _{ x }= P _{ x }$.
The relationship between MU and price helps to understand the law of demand.
To compare MU with price, it is necessary to ) convert MU in terms of money.
Let us assume that, 1 unit of $MU =₹ 10 /-$ So, units of MU multiplied by $₹ 10 /-$ (as shown in column
Market price of each unit of commodity ' $x$ ' is ₹ $50 /-$ (as shown in column 4)
Column 5 shows comparison between MU and price.
It is observed that, for the first and second unit, MU (in terms of money) is greater than the price paid for them it means $MU _{ x }> P _{ x }$.
So, a rational consumer will be willing to buy 1 st and 2 nd unit of commodity ' $x$ '.
At the 3rd unit a commodity ' $x$ ' MU equals ) the price. So, the consumer can also think of purchasing it. Here, $MU _{ x }=$ $P_x$
But, in case of 4th and 5th unit, MU is less than price. Therefore, a rational consumer will not purchase these units because $MU _{ x }< P _{ x }$
The relationship between MU and price can be summarised as follows:
1. When MU is greater than price, a consumer is willing to buy those units. They are called Intra- Marginal units ( $MU _{ x }$ $>P_x$ ).
2. When MU becomes equal to market price, a consumer can also think of buying that unit. It is called Marginal unit $\left( MU _{ x }= P _{ x }=\right.$ Consumer's equilibrium).
3. When MU is less than price, a rational consumer is not willing to buy them. They are called Extra-marginal units $\left( MU _{ x }< P _{ x }\right)$ Thus, a rational consumer attains equilibrium where $MU _{ x }= P _{ x }$.
The relationship between MU and price helps to understand the law of demand.
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