Law of equi marginal utility
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The law of equi-marginal utility states that consumers will allocate their limited income across different goods in a way that equalizes the marginal utility per rupee spent. Specifically, the traditional statement is that a consumer will spend their money such that the last rupee spent on each good yields equal satisfaction. Alternatively, the modern statement is that marginal utility divided by price will be equal across goods, allowing consumers to maximize total utility. This law assumes consumers can purchase multiple goods and aims to explain how consumers allocate resources to maximize satisfaction given budget constraints.
Law of equi marginal utility
- 1. Law of Equi-Marginal Utility Dr. Dhiresh Kulshrestha Associate Professor (Economics)
- 2. Law of Equi-Marginal Utility Definition • It is the second important law of the utility analysis. This law was first propounded by “Hermann Heinrich Gossen (1810–1858)”. • It is known as “Gossen’s Second Law” • This law points out how a consumer can get maximum satisfaction out of given expenditure on different goods.
- 3. Assumptions of the Law • The law states that in order to get maximum satisfaction, a consumer should spend his limited income on different commodities in such a way that the last rupee spent on each commodity yields him equal marginal utility
- 4. Definition • Dr. Marshall, “If a persons has a thing which he can put to several uses, he will distribute it among these uses in such a way, that he has the same marginal utility in all.
- 5. Two Statement of Law • This law can be explained as • 1. Traditional statement • 2. Modern statement
- 6. 1. Traditional Statement of the law • According to traditional statement: • The consumer will spend his money income in such a way that last rupee spend on each product will give him equal Satisfaction. MU1 = MU2 = …………….Mun
- 7. Conditions • There must be two or more commodities • What ever marginally utility he/ she gets from both commodity must be equal • He/ She must spent all the income
- 8. For Example Income Spent Suppose X person’s Income= Rs 100 • Price of one Apple =20, and Price of one Banana = Rs. 10 For Example: 1*20=20 and 3*10=30 then Total Income spent = Rs. 50 • 3*20=60 and 4*10=40 then Total Income spent = Rs. 100
- 9. 2 Modern Statement • Modern economist also call it as the ‘ Law of Proportionality’. • According to them a person gets maximum satisfaction when the weighted marginal utilities are equal.
- 10. In other words • In other words, when marginal utilities of one commodity divided by its price and the marginal utility of the other commodity divided by its price are equal. MUa / Pa = Mub/ Pb = Muc/Pc
- 11. Modern Method Calculating MU with Price
- 12. Consumer’s Choices Law of Equi-Marginal Utility
- 13. Loss and Gain b/w X and Y
- 14. Importance of the law • Consumption • Production • Exchange • Price discrimination • Distribution • Public finance and International trade • Distribution of assets and Distribution of time • Saving and investment
- 15. Criticism of Law of Equi-marginal Utility • Non availability of goods • Influence of fashion, customs and habits • Tastes and preferences are not constant • Indivisibility of goods • Change in income and price • Complementary goods • Marginal utility of money does not remain constant (Inflation effect)