LAWS OF CONSUMPTION

CONTENTS

• Concept of Utility
•Law of Diminishing Marginal Utility
•Law of Equi Marginal Utility
 UTILITY
The level of satisfaction derived from continuous
consumption of a standard unit of a commodity.

1. Initial Utility (IU)

2. Marginal Utility (MU)
3. Total Utility (TU)
1. Utility derived from the first unit of
commodity.

2. Addition made to the total utility by the

additional unit.

3. Utility derived by a person from the total

number of units of a commodity.
 Relationship Between TU and MU

• MU +ve, TU increases

•MU 0, TU maximum

•MU –ve, TU decreases

 LAW OF DIMINISHING MARGINAL
UTILITY

“As a consumer consumes more and more units of

a specific commodity, utility from the successive

units goes on diminishing”.

 ASSUMPTIONS
Homogenous Units.
Continuous Consumption.
Rational Consumer
Tastes, preferences, and fashion remain
unchanged.
Utilities of different commodities are
independent of each other.
Suitable Size
Divisible Goods
Cardinal Measurement of Utility
 Illustration
Units of a Total Utility Marginal Utility
Commodity
1 10 10
2 18 8
3 24 6
4 28 4
5 30 2
6 30 0
7 28 -2
Graphical Representation
 Exceptions
Articles of Distinction

Rare Commodities

Habits

Good Poem or Music

Drunkard

Very Small Size of Units

 LAW OF EQUI-MARGINAL UTILITY
Second important law of the utility analysis.

This law was first propounded by Gossen. known as

“Gossen’s Second Law”.

How a consumer can get maximum satisfaction out of

given expenditure on different goods?
 Assumptions
No change in the price of goods or services.

Limited income of consumer.

Constant marginal utility of money.

Rational consumer.

Consumer tries to maximize satisfaction.

Utility is measurable.

Unlimited wants.
 Explanation
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.
 According to 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.”

This law can be explained as :

1. Traditional statement

2. Modern statement
 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 = …………….Mum

 Modern Statement
Law of Proportionality.

A person gets maximum satisfaction when the weighted

marginal utilities are equal.

 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, only then a
person derives maximum satisfaction.
 Illustration
Rupee MU of Apples MU of Bananas
1 10 7
2 8 6
3 6 5
4 4 4
5 2 3
Graphical Representation
 Criticism
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

 References
https://youtu.be/_c9BN-foqwk

https://youtu.be/wFrGhooQheU

https://youtu.be/1exopHOl1jo

https://youtu.be/LOjyVoGTGj8