Law of equi marginal utility

Law of equi marginal utility: The Law of Equi Marginal Utility discusses the relationship between the consumption of two or more products and the optimal consumption combination of these products. The additional enjoyment achieved by consuming one more unit of a commodity is known as marginal utility. Let’s make an effort to comprehend.

What is marginal utility?

Simply put, it is the additional pleasure derived by consuming one more unit of an item. It is the approximate change in overall utility as a result of a one-unit change in commodity consumption. With each new rise in the consumption of a good, it lowers. You’ll ask yourself, “How?”

Assume you consume one chocolate bar. What will your emotions be like? Isn’t it wonderful? Assume you consume another bar. Are you still content? Maybe. Is the feeling the same if you go for another one? No, you’re not happy right now. Furthermore, you begin to feel a little ill. As the number of units of the same item increases, the marginal usefulness decreases.

WHAT IS THE LAW OF EQUI MARGINAL UTILITY?

H.H.Gossen (1810-1858) of Germany was the first to mention the equi-marginal principle. As a result, it is known as Gossen’s Second Law. In his ‘Principles of Economics,‘ Alfred Marshall refined this law significantly.

The law of equi-marginal utility explains how a buyer behaves while purchasing many goods. Wants are limitless, but the amount of money accessible to consumers to fulfil all of their desires are restricted. This law outlines how a consumer spends his limited funds on a variety of goods to get optimum happiness. 

The law of equi-marginal utility is often referred to as the law of substitution, the law of maximum satisfaction, or the principle of price-marginal utility proportionality.

Definition

“If a person has a thing that can be put to numerous uses, he will distribute it among these uses in such a way that it has the same marginal utility in all,” Prof. Marshall says.

Assumptions

1. Because the buyer is reasonable, he seeks the highest level of satisfaction.

2. Each commodity’s utility can be calculated.

3. Money’s marginal utility is unaffected by inflation.

4. The consumer’s earnings are revealed.

5. The prices of the items are provided.

6. The law is based on the declining marginal utility principle.

Explanation of the law

Assume there are two commodities, X and Y, on which a consumer must spend a certain amount of money. Because the customer is rational, he will aim to maximise his total utility or satisfaction by spending his limited income on items X and Y. Only then will the consumer be in a state of equilibrium.

The consumer will be in equilibrium when the utility received from the final rupee spent on each is equal, according to the law of equi-marginal utility.

Types of marginal utility

There are three forms of marginal utility based on the connection between total and marginal utility.

Positive

When the total utility increases as a result of consuming an additional unit of a product, the marginal utility is positive. It might be as simple as receiving a complimentary hair spa coupon.

Negative

When the consumption of an additional unit of a product results in a drop in total utility, it is negative. It might be as simple as taking additional vitamin supplements or taking too many drugs.

Zero

It is zero when consuming an additional unit of a product does not affect the total utility. One example of zero marginal value is getting two copies of the same novel.

Limitations of the law

The following problems plague the law of equi-marginal utility.

1. Goods’ indivisibility

The fact that many goods, such as a car or a house, are indivisible weakens the idea. The law does not apply in the event of indivisible items.

2. Money’s Marginal Utility Isn’t Constant

The hypothesis is founded on the premise that money’s marginal value is constant. However, this is not the case.

3. It is impossible to quantify utility.

The price a consumer is ready to pay for a commodity is equal to its marginal utility, according to Marshall. However, current economists contend that just because two people pay the same price for an item does not mean they receive the same level of utility. As a result, utility is a subjective concept that cannot be assessed quantitatively.

4. The Interdependence of Utilities

This law presupposes that commodities are self-contained and, as a result, their marginal utilities are self-contained as well. Commodities, on the other hand, are either substitutes or complements in real life. As a result, their utility is intertwined.

5. Budget Period Is Indefinite

Indefinite budget periods, according to Prof. K.E. Boulding, are another legal challenge. The budget term is usually believed to be a year. Certain commodities, on the other hand, are available in many accounting periods. Marginal utility is difficult to quantify for such items.

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