Managerial Uses of Price Elasticity

of Demand
1.
2.
3.
4.

5.
6.

Determination of price under Monopoly.

Basis of Price discrimination.
Price determination of Joint Products.
Determination of prices of public
utilities.
International Trade.
Effect on Employment.

Law of Equi-marginal utility

The Law of Equi-marginal utility is the
further elaboration of the Law of
diminishing marginal utility.
It is also known as the Law of
Substitution and the Law of
maximization of satisfaction.

Continue.
The house holds maximizing the
utility will so allocate the expenditure
between commodities that the utility
of the last Rupee spent on each item
is equal.
Formula for Consumers equilibrium
MUA/PA = MUB/PB = .= MUN/PN

Continue.
Assumptions:
1. Utilities are independent
2. Marginal utility of money remains
constant.
3. Utility is cardinal.
4. Consumer is rational.

Explanation
We assume that:
1. The consumer has Rs.5 with him.
2. He has to spend his income on two
goods A and B.
3. The price of each good is Rs.1 per
unit.

Table
Units of
money

MU of A

MU of B

12

10

10

Total

39

30

Limitations..
1.
2.
3.
4.

Utility is immeasurable.
Indivisible goods
Prices and tastes are changing.
Time Factor.