Economics

The Law of Equi-Marginal Utility

The law of diminishing marginal Utility is applicable only to the want of a single commodity. But in reality, wants are
unlimited and these wants are to be satisfied. Hence, to analyze such a situation,the law of diminishing marginal Utility is extended and is called “Law of Equi-Marginal Utility”. It is also called the “Law of Substitution”, “The Law of Consumers Equilibrium”, “Gossen Second Law” and “The Law of Maximum Satisfaction”.

Definition:
Marshall states the law as, “If a person has a thing which he can put to several uses, he will distribute it among these uses in such a way that it has the same marginal utility in
all. For, if it had a greater marginal Utility in one use than another he would gain by taking away some of it from the second use and applying it to first”.

Assumptions:
1. The consumer is rational in the sense that he wants to get maximum satisfaction.
2. The utility of each commodity is measurable in cardinal numbers.
3. The marginal utility of money remains constant.
4. The income of the consumer is given.
5. There is perfect competition in the market
6. The prices of the commodities are given.
7. The law of diminishing marginal utility operates.

Explanation:
The law can be explained with the help of an example. Suppose a consumer wants to
spend his limited income on Apple and Orange. He is said to be in equilibrium,only when he gets maximum satisfaction with his limited income. Therefore, he will be in equilibrium, when,
Marginal utility of Apple
——————————————— Price of Apple

=Marginal utility of orange
———————————————=K
Price of Orange

Eg. 50⁄10= 20⁄4=5
Marginal utility of Apple Price of Apple
Marginal utility of Orange – Price of Orange -m
K- Constant Marginal Utility of Money

Diagrammatic Illustration:
In diagram 2.3, X axis represents the
amount of money spent and Y axis
represents the marginal utilities of Apple
and Orange respectively. If the consumer
spends ₹6 on Apple and ₹5 on Orange,
the marginal utilities of both are equal
i.e.,AA1=BB1 (4=4). Hence, he gets maximum utility.
Criticisms:
1. In practice, utility cannot be measured, only be felt.
2. This Law cannot be applied to durable good.

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