Basic assumptions of Marginal

Utility Analysis
 Cardinal measurement of utility:- It is assumed
that utility can be measured and can be given definite
quantity like 1,2 or 3.This means that a person can
express the satisfaction derived from consumption of
commodity in quantitative term.
 Utilities are independent:-Marginal utility assumes
that utility of different commodities are independent to
each other.
 Constant Marginal utility of money:-Another
important assumption is that the marginal utility of
money remains constant.
 Introspection:-The Marginal utility also assumes
that from one’s experience ,it is possible to draw
inference about other person.
BASIC LAWS OF MARGINAL UTILITY
LAW OF DIMINISING
MARGINAL UTILITY

LAW OF EQUI-MARGINAL
UTILITY
LAW OF DIMINISHING MARGINAL
UTILITY
 This law can be stated as the fall in marginal utility of
any good due to successive consumption of that good.
For ex:- Suppose a person starts eating toast, the first
toast gives him great pleasure. By the time he taking
second he yield less satisfaction ;the satisfaction of
third is less than that of second and so on. the
additional satisfaction goes on decreasing with every
successive toast till it drops down to zero; and if the
consumer forced to take more the satisfaction may
become zero.
 This can also be shown by graph
20
15
10
5
Units of 0
utility 1 2 3 4 5 6 7 8
-5
-10
-15
-20

Units of commodity consumed

Diminishing marginal utility curve
LIMITATIONS OF THE LAW
 Suitable units:- It is assumed that the commodity is
taken in suitable units.
 Suitable time:-It is further assumed that the
commodity is taken within a certain time, otherwise
law will not apply.
 No change in consumer’s tastes:-Another
assumption is that the character of the consumers
does not change.
 Normal persons:- The law of diminising marginal
utility applies to normal persons and not to eccentric
or abnormal persons like misers.
 Constant income:-it is also essential that the income
remains the same. Any change in income will falsify
the law.
 Rare collections:- In case of rare collections ,the law
does not hold good.
 Fashion:- Further, fashion utility depends on fashion
too.
Marginal utility
 Marginal utility can be defined as the change in the
total utility resulting from a one-unit change in the
consumption of a commodity per unit of time.

 Marginal utility= Change in total utilty

Change in quantity consumed
Marginal utility of Money
 Money is a general purchasing power . It enables the
purchaser to buy anything he likes. That is why it is
said one can never reaches the stage where money
ceases to be desired. That is , the marginal utility of
money goes on increasing with its increase . This is
oppose to the law of diminishing marginal utilty.
Marginal utility and price
 The consumer stops where the price and marginal
utility are equal. All units of commodity being
interchangeable , what is paid for the marginal unit is
paid for every unit. Therefore , we can say that
marginal utility determines price. It is marginal utility
and not the total utility that determines price, other
wise the price of water should have been high and that
of gold is low.
Marginal utility and supply
Marginal utility is a function of supply, i.e., it varies with
supply . In the case of a free good, where the supply is
unlimited , the marginal utility is zero. Only in the
case of scare goods is the marginal utility is positive . It
increases as the supply contracts and decreases as the
supply increases.
Marginal utilities of related goods
 There are two types of relationship between goods:

1.They may be substitutes

2.They may be complementry

In case of substitutes
 The substitutes are capable of satisfying same want.eg
tea and coffee, rail transport and road transport. In
case of such goods ,other things being equal , the
marginal utility of any such goods decreases as the
quantity of the sustitute goods with the consumer
increases.
In case of complementary goods
 Complementary goods are such goods which are
wanted together for the satisfaction of a want e.g.,
paper ,pen and ink for writing. In such cases other
things remaining the same, marginal utility increases
as the quantities of the complementary goods with the
consumer increase .
Practical importance of law of
diminishing
 Taxation
 Price determination
 Household expenditure
 Socialism
 Downward sloping demand curve
Law of equimarginal utility
 Every prudent person wants to make the best of his or
her resources. This is necessary because resource are
scarce in relation to wants ,a fundamental proposition
with which we started the study of economics . Every
consumer aims at getting the maximum possible
satisfaction for this purpose he will be substitute the
more useful for the less useful thing when he has done
so, it will be found that marginal utilities in each
direction of his purchases have been equalized.
Diagrammatic representation
Limitations of the law
 The law of equimarginal utility involves very careful
calculations of the expected satisfaction and its
comparisons with the amount of money spent as well
as with the satisfaction which may be derived by
spending by the same amount of money on some other
things. But how many of us are capable of making such
fine calculations.
 Only in case of big expenditure, a prudent person goes
through a certain amount of thinking .
 Ignorance of consumers imposes another limitations.
 People are sometimes slave of fashion and customs
and are incapable of rational consumption. Without
being rational and calculating, a consumer cannot
substitute one thing for other. This is another
limitation of law.
 Another limitation arise from the fact that goods are
not divisible into small bits to enable consumer to
equalize marginal utilities.
 The law of substitution has no place when the
resources are unlimited as in the case of free goods. In
such cases , there is no need to rearrange expenditure
because no price is to be paid whatever the quantity
used.
Practical importance of the law
 It applies to consumption
 Its application to production
 Its application to exchange
 Price determination
 Its application to distribution
 Public finance
Consumer's equilibrium

When the consumer attains the position of maximum

satisfaction and would have no further incentive to
make any change in the quantity of the commodity
purchased
Equilibrium with one commodity
purchase
 The law of diminishing marginal utility tells us the
position of a consumer’s equilibrium in the case of
one-commodity purchase . He will go on buying
successive units of the commodity till the marginal
utility of the commodity becomes equal to the price.
If the price falls ,he will buy more and the marginal
utility will come down to the level of price. On the
other hand the price goes up , naturally less will be
purchased and the marginal
Equilibrium with two commodity
purchase
 In case of the consumer is buying two commodity X
and Y , the position of equilibrium will be determined
according to the law of equimarginal utilities . It has
already been stated that a consumer derives maximum
satisfaction when the marginal utilities of two
commodities are equal. In case they are not equal ,
adjustment will be made in the matter of quantities
purchased, more of the commodity with higher
marginal utility and buying less of the lower marginal
utility till the marginal utilities of the commodities are
equalized. This is a position of maximum satisfaction.
 MUe= Mux
Px
Where MUe= Marginal utility of expenditure
MUx= marginal utility of commodity X
Px = price of commodity X

From the above , we can derive a formula for a

consumer’s equilibrium in respect of two goods X and
Y by him as under:
MUx = MUy
Px Py