The Marginal Equivalency Condition

 The Marginal Equivalency Condition

 A consumer will maximize utility when the last dollar spent on every good or service yields an equal benefit. This is true when the marginal utility of the last units purchased, divided by the price, is equal: MU_A/P_A = MU_B/P_B = MU_C/P_C = MU_D/P_D = etc. In perfect competition, price=marginal cost. So in an economically efficient, perfectly competitive market, MU_A/MC_A = MU_B/MC_B = MU_C/MC_C = MU_D/MC_D = etc. This is an equilibrium situation and any other allocation of resources will tend to move towards this equilibrium as profit maximizing producers and utility maximizing consumers attempt to improve their lot.

 Short & Long Run Equilibrium

 In short run equilibrium, price=MC. In long run equilibrium, price=MC=LRMC=minimum ATC=minimum LRAC. But long run equilibrium is rarely reached because of technological change, change in consumer preferences, etc.