subject: Explain the Law of Equi – marginal Utility [print this page] Explain the Law of Equi marginal Utility
THE LAW OF EQUI MARGINAL UTILITY :
STATEMENT OF THE LAW :
" other things being equal, a consumer gets maximum total utility from spending his given income, when he allocates his expenditure to the purchase of different goods in such a way that the marginal utilities derived from the last units of money spent on each item of expenditure tend to be equal."
This indicates that the consumer maximizes his satisfaction when he obtains equi marginal utilities from all the goods purchased at a given point of time.
MEANING
Since the consumer has limited resources as compared to his wants, he makes the best use of his limited income by allocating it over various commodities so as to derive maximum satisfaction.
For better understanding, Sir Alfred Marshall has formulated the proportionality rules, which states that when the ratios of marginal utilities to prices of different goods are equalized with the given marginal utility of money income of the consumer, the consumer will derive maximum satisfaction and will be at equilibrium.
Symbolically, it can be stated as :
MUa = MUb =MUc =m; where:
Pa Pb Pc
MU = marginal utility,
P = price.
M = marginal utility of the given money income.
a,b,c = different goods.
ASSUMPTIONS :
The following are the assumptions of the law of equi marginal utility :
1) The consumer is a rational man.
2) Utility can be measured cardinally.
3) The consumer has fixed limited income.
4) Prices of goods remain constant.
5) Marginal utility of money remains constant.
6) The wants and goods can be substituted.
7) The consumer has given scale of preference of goods.
ILLUSTRATION :
Let us assume that a consumer has a given income of rs.18 to spend on goods a, b & c whose prices are Rs. 3, Rs. 2 and Rs. 1 respectively.
MU Schedule
UNITS
MU (a)
MU(b)
MU(c)
1
36
18
10
2
30
12
6
3
27
8
5
4
18
6
4
5
12
4
2
6
6
2
1
MU/P Schedule
UNITS
MU(a)/P(a)
MU(b)/P(b)
MU(c)/P(c)
1
12
9
10
2
10
6
6
3
9
4
5
4
6
3
4
5
4
2
2
6
2
1
1
Suppose marginal utility of income is Rs. 1 = 6 units.
M = 6/1
For MU(a)/P(a) = 6/1 , the consumer buys 4 unit's of a'
For MU(b)/P(b) = 6/1, he buys 2 units of b'
& for MU(c)/P(c) = 6/1, he buys 2 units of (c).
He allocates his total income of Rs. 18 as
Rs. 12>for 4 units of a'
Rs. 4 > for 2 units of b'
Rs.2 > for 2 units of c'
Thus, he derives maximum satisfaction.
The total utilities of a', b', c', will together give him total satisfaction.
Total utility of a = 36+30+27+18=111
b = 18+12=30
c = 10+6=16
total satisfaction = 111+30+16=157
thus, if the consumer allocates his income in any other way, he will not derive maximum satisfaction.
DIAGRAMMATIC REPRESENTATION
FiG 1.3
Limitations :
1) The law is based on unrealistic assumptions like homogeneity, continuity, etc.
2) Cardinal measurement is not a realistic phenomenon.
3) The law cannot be applied to indivisible goods.
4) Marginal utility of money may not always remain constant.
5) Consumer's ignorance may pose limitations.
CONCLUSION :
Despite its, criticisms , the law is applicable. The consumer tries to derive maximum satisfaction by allocating his resources (income) among different products as explained by the law.
