Law of Equi Marginal Utility

“The utility will be maximised, when the marginal unit of expenditure in each direction brings in the same increments of utility.”

-Prof. J.R. Hicks

Thus, the law of Equi-marginal utility explains that wants of every consumer are unlimited, but the resources available with him to satisfy these wants are limited, that too having alternative uses. Therefore, he spends these resources in a manner that he may get maximum satisfaction.

According to this, a consumer is in equilibrium when he distributes his given money income among various goods in such a way that marginal utility derived from the last rupee spent on each good is the same.

The income at his disposal at any time is limited. The consumer is therefore, faced with a choice among many commodities that he can and would like to pay. He therefore, consciously or unconsciously compares the satisfaction which he obtains from the purchase of the commodity and the price which he pays for it.

As he buys more and more of that commodity, the utility of the successive units begins to diminish. He stops further purchase of the commodity at a point where the marginal utility of the commodity and its price are just equal.

If he pushes the purchase further from his point of equilibrium, then the marginal utility of the commodity will be less than that of price and the household will be a loser. The consumer will maximize total utility from his given income when the utility from the last rupee spent on each good is the same

The law of Equi marginal utility is simply an extension of the law of diminishing marginal utility to two or more than two commodities.

The law of Equi marginal utility is known, by various names. It is named as the Law of Substitution, the Law of Maximum Satisfaction, the Law of Indifference and the Proportionate Rule.

This law has been illustrated with the help of table given below.

Units

MU of Apples

MU of Oranges

1

10

7

2

8

6

3

6

5

4

4

2

5

2

0

6

0

-2

7

-2

-4

8

-4

-6

Suppose apples and oranges are the commodities to be purchased suppose we have Rs. 5to spend. Let us suppose that price of both the goods is Rs.1 per unit. We will spend first rupee on apple for it gives us highest utility.

First Rupee – Apple

Second Rupee – Apple

Third Rupee – Orange

Fourth Rupee – Apple

Fifth Rupee – Orange

Now the MU of last rupee spent on both oranges and apples is the same i.e. 6. This arrangement yields maximum satisfaction. Thus,

Total utility of 2 oranges would be 7+6=13

Total utility of3 apples would be 10+8+6=24

Total utility from both goods is 37.

Thus, it can be concluded that we obtain maximum satisfaction when we equalize marginal utilities by substituting some unit of the more useful for the less useful commodity.

Any other combination will result in decreased TU.

Assumptions: The main assumptions of the law of Equi-marginal utility are as under:

(1) Independent utilities. The marginal utility of different commodities is independent of each other and diminishes with more and more purchases.

 (2) Constant marginal utility of money. The marginal utility of money remains constant to the consumer as he spends more and more of it on the purchases of goods.

(3) Utility is cardinally measurable.

(4) Every consumer is rational in the purchase of goods.

(5) Limited money income. A consumer has limited amount of money income to spend.

Limitations of the Law

Firstly, the utility derived from commodities is not measurable in cardinal numbers.

Secondly, the marginal utility of money cannot be constant. As the money you possess depletes, the marginal utility of money increases.

Thirdly, even a rational economic individual does not allocate his or her income according to the law. Usually, people tend to spend in a certain rough fashion. Therefore, the applicability of the law is doubtful.

Finally, the law assumes that commodities and their marginal utilities are independent. However, in real life, we see many substitutes and complements. In this case, the law loses its credibility.

Practical Importance of Law of EMU:

  1. Consumption: A wise consumer acts on this law while arranging his expenditure and obtains maximum satisfaction.
  2. Production: To obtain maximum net profit, he must substitute one factor of producing to another so as to have most economical combination.
  3. Exchange: Exchange implies substitution of one thing to another and hence this law is important.
  4. Distribution: It is on the principle of the marginal productivity that the share of each factor of production is determined.
  5. Public finance: The Govt. is also guided by this law in public expenditure. The Govt. can expend its revenue (money) in such a way that it will secure maximum welfare of the people.

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