LAW OF EQUI-MARGINAL UTILITY Law of equi-marginal utility is one of the significant laws of economics which is based on &: sxpeticnces, It has various names as the law of substitution, the law of maximum satisfaction, the law Sonsumption, the law of economy, the fi oTHATerence, ete. Ir salso called Gossen: s38 propounded by TH Gowen, a GconoMBCOFAIS I in the ninetwenth century. Law of diminish ‘marginal utility is called Giossen’s first law, This law isalso called as the law of proportionality due to its modes explanation, This law presents traditional approach of consumer equilibrium, EXPLANATION OF THE LAW Human wants are unlimited but the problem for every individual to choose the se resources to satisfy these wants are limited. Therefore, it isthe ‘quence in which these wants are to be satisfied to get maximun tulity, The consumer has to distribute his resources in such a way so that utility obtained from last units o different artic! me. Then only. the objective of maximum satisfaction can be obtained. Ti the words of..R. Hicks, “The utility will maximise when the marginal unit of expenditure in each irection bring the same increments of utility.” Marshall has given the definition for this law as, uses he will distribute it among these uses in such a way that it has the same util marginal utility in one use then another he would gain by taking some oft trom second ass the first.” This definition given by Marshall is very significant in relation to bo money is used in place of commodity it applies on it also, Money is an article which can be Purposes. When a consumer spends his money on any aticle, its utility decreases as per lavy, he realises that he can get more satisfaction by spending additional money in other articles, Thus he st Product whose marginal utility is low, and starts purchasing other article having higher marginal OPS buying Previous article at that time, He transfers higher uty commodity in place of lower utility aru at; method of spending so that marginal uility derived from the last unit of money spent on all the article j each case, is ASSUMPTIONS OF THE LAW Like the other laws of economics this law is also based on some assumptions, The main ai are as follow : Ptio; 1. Consumer is a rational human being who thinks in economic sense before spending fo. maximum satisfaction. sever 8 greatet and applying into th, commodity and Money. When utilised for different and after so, ns Mining Scanned with CamScanner2. The income, interest, fashion and behaviour of consumer are cons 3. The marginal utility of money is same. 4. Consumer spends his money in small amounts, 5, Utility can be measured in money scale measurement nitat a particular time duration. Explanation of the law with example and diagram \Weean illustrate the explanation ofthis law with a diagram. Suppose, a consumer has ten rupee which jpvants to spend in two commodities, wheat and sugar, (only two commodities have been taken for convenienc® jtmore than two commodities can also be taken for study), The utility derived from spending one rupee each ‘both the items are given in the table as below Unit of money Marginal utility Marginal utility (Rs) of wheat ofsugar 1 2(I) 18(3) 2 20(2) 165) 3 18(4) 14) 4 166) 120) 5 148) 10 6 12(10) 8 7 10 6 8 8 4 9 6 2 10 4 0 Certainly, the consumer will spend first rupee on wheat because he gets utility equal to 22 units which {shigher than 18 units of sugar. He will spend his second rupee also on wheat, He can spend his third rupee on ‘wheat or sugar because utility in both the cases are same as 18 units, suppose, he spends third rupee on sugar and forth rupee on wheat similarly, he will spend fifth rupee on sugar, sixth on wheat seventh on sugar, eighth con wheat, ninth on sugar and tenth on wheat. Consumer will spend six rupees on wheat and four rupees or sugar, The rupees spent has been shown in brackets. Through spending in such a way, the marginal utiit, derived from the spending in last units (ninth and tenth) of both the item are equal. This way, consumer gets thy ‘maximum satisfactions. This theory can be implemented to more than two commodities in similar way. In diagram-1, the money units are shown on OX line and the obtained marginal utility is shown on O° line, Two lines are drawn on diagram which represent marginal utility of wheat and sugar. Spending Rs. 6 ¢ ‘wheat and Rs, 4 on sugar gives same marginal utility in both the case that is 12 unit. If customer changes tt sequence of spending and spends Rs. 7 on wheat and Rs. 3 on sugar, increase in the utility will be 10 unit here as the loss will be equal to 12 units, This way loss is high in comparison to gain and there will be declit intotal utility. Consumer will get maximum satisfaction if he spends six unit of money on wheat and four un ‘of money on sugar and marginal utilities are equal in both the case. It is a memorable fact that consumer has ‘qualise marginal utilities of articles to get maximum satisfaction. Scanned with CamScannerWheat Rn 2 8 es i " Ps. © Equi-marginal line 6 203 —— ‘Units of money (%) —_—> (Diagram-1) Modern Interpretation of the law : Modem economists an: utility in an upgraded way, which is called the law of proportionality. The me tnade in the ratio of marginal uilities of various commodities and ther, prices, ‘ommodity same to get maximum satisfaction. On th odities are in ratio of obtained marginal utilities, In the previous ex whereas the consumer can alyse the law of equi-margind iodern explanations of the law is so that the price of comm planation there is no consideration al hot take any decision about marginal utility of first commodi commodities marginal utility and their respective prices, below Marginal Utility of Marginal Utility of Commodity A. _CommodityB Commodity D Price of Commodity A Price of Commodity B. . Price of Commodity C Marginal Utility of sete MU, _ MU, _MU, , ROR ‘. Due to the equal ratio in each case between the marginal utility of commodity and its rice, equi-marginal utility is called, the law of proportionality by modem economists, te this law of Scanned with CamScannerSCOPE, APPLICATION OR IMPORTANCE OF THE LAW Law of equi-marginal utility has significant role in economies. This law is applicable 18 at ee aries of economies-consumption, production, exchange, distribution and public revenue. i uy. Wan,-"The aplication ofthe principle of substitution extends over almost every fie of economic enauiry oi cated the base for economics. I emphasises on human behaviour of satisfying unlimited wants PY oe cgources. The importance of this law are as helow, Bi Ta the Area or Consumption : This law helps the consumer in satisfying unlimited wants throveh sed resourses, The maximum satisfaction to consumer wil be obtained! when marginal utility obtained from ne cemmoitcs are sae, Consumer ean make proper arrangement for present and Future needs with th ie aw Inher words, the at of het distribution beween consumption and savin can be made by a 2.Inthe Area of Production : Every manufacturer wants to carn maximum: profit with minimum cost of suction. A comparison is made between marginal productivity of resources ‘and their prices to minimise Las Fey oF production by the producer. Every producer calculates the marginal productivity of various somes S35, land. labour and capital ete. and replaces the costly resources by cheaper resources This replacement oneal the stage when the ratio between marginal productivity of various resources and their prices beco! + When this law is used in production, itis known as substitution law of production. Producer's equilibrium Gil achieved in condition when : Marginal Productivity of — Marginal Productivity of | Marginal Productivity of resource A ____tesource B resource C Price of resource A Price of resource B Price of resource C 3. Im the area of Exchange ; Law of equi-marginal utility is very helpful in exchange and price {Etemination. Consumers pay the maximum price of the commodity which is equal to its marginal tility: The xchange of commodities between two persons is carried on till the marginal utilities of both the commodity are gil fr each price. When exchange starts, the utility of both the commodities individualy is more than utility deved from other commodity. With the progress ofthis exchange, the quantity of nearby commodity get lesser spi quantity of other gets more. Thus, the utility of nearby goods increase and other goods utility decrease | en a point comes where utility for both are equal. Suppose, a customer takes rice in exchange of wheat. It ‘peans rice has more utility then wheat, As he purchases more and more rice, its utility falls and a point comes ‘shen the marginal utility of both rice and wheat become equal. This way, the exchange of two commodities is one tll the marginal utility of both commodities are equal. 4.In Area of Distribution : The problem with distribution is how to distribute the share of each resources in production for the contribution made by them. The reward of factors of production (rent, wages, izxerest, profit) are given according to their marginal productivity. 's.In the Area of Public Finance : The significant principle of public finance that is maximum social évantage is also based on equi-marginal utility. The objective of every democratic government is to maximise the social welfare of people. Government. distributes the expenditure, while spending on various item, so that £9ui-marginal utility in each expenditure is same. Taxes are levied by the f0vernment in way so that burden on different segments of society are same. This law is very important for ‘uxation system and expenditure system also. Conclusion of these discussion is that this law is applicable in our routine life also. Prof. Robbins has Scanned with CamScannerTightly said that this law: is foundation of economics because it analyzes the efforts f AUS of human being by limited resources, This law is he satisfaction by limited for Satisfying Un} Ipful in solving universal Problem OF untimitgs Ny resources. \ CRITICISMS OF THE LAW Following are the main criticisms of law of equi-marginal utility : 1. Economie Urationatity he Assumption of this law is ecording to utility deriy modi always hoth, that consumer is 4 3 z z & 5 = g g 3 3 z 3 Ment, ther ul F various commodit, lesa 'S. This. eNO avaitayy "AY this law doen able Scanned with CamScanner