Law of equi marginal utility

Definition
• Dr. Marshall states this law as, "If a person has
a thing which he can put to several-uses, he will
distribute it among those uses in such Way that
it has the same marginal utility in all"
• In the words of Prof. Lipsey, "The household
maximizing the utility will so allocate the
expenditure between commodities that the
utility of the last penny spent on each is equal.
 Law of equi marginal utility
• To equalize the marginal utilities of money
spent on different commodities in order to
attain maximum satisfaction is termed as law
of equi marginal utility
 Explanation
Due to multiplicity of wants and scarcity of means, every prudent.
Consumer wants to make the best use of resources. The object is to get
maximum possible satisfaction. For this purpose, he substitutes the
more
Consumer has five unit of money to spend and he wants to buy two
commodities only, i.e., A and B. The price of each unit of Rs. one each.
He has three options.
• Now, we explain the law with the help of an example.
• He may spend total amount on A.
• He may. spend total amount of B.
• He may spend some amount on a and some
• On B useful goods for the less useful things
Table
 When total amount is spent on A.
• TU from A = 60 + 50 + 40 + 30 + 20= 200 utility
When total amount is spent on B
• T.U. from B= 50 + 40+ 30 + 20+ 10= 150 utility

• But if he equalizes the marginal utility utility of

money spent on both the commodities, his total
satisfaction will be maximum. It is when he
spends three units of money on A and two on B.
ln other words, 3 units of A Commodity and 2
units of B commodity are purchased.
Units of money
60 + 50 + 40
50 + 40=240 utility
• When the consumer disturbs this combination and
spends 4 units of money on A and one on B, then
its total 230 utility so the consumer is getting less
satisfaction than before.
•
 Explanation of table
When total amount is spent on A.
• TU from A = 60 + 50 + 40 + 30 + 20= 200 utility
When total amount is spent on B
• T.U. from B= 50 + 40+ 30 + 20+ 10= 150 utility

• But if he equalizes the marginal utility utility of money spent on both the
commodities, his total satisfaction will be maximum. It is when he spends three
units of money on A and two on B. ln other words, 3 units of A Commodity and 2
units of B commodity are purchased.
Units of money
60 + 50 + 40
50 + 40=240 utility
• When the consumer disturbs this combination and spends 4 units of
money on A and one on B, then its total 230 utility so the consumer is getting less
satisfaction than before.
 Explanation Of Diagram
• In the diagram, we measure units of money
along x-axis and the marginal utility of
money spent on A and B commodities along
y-axis. Mua is the marginal utility curve of
the amount of money spent on A commodity
and MUb is the marginal utility curve of
money spent on B commodity. When
consumer buys 3 units of A and 2 units of B
commodity, he is in equilibrium position.
• But when he disturbs this combination and
spends four units of money on A and one on
B (i.e. 4 units of A and 1 of B are
purchased), the loss of utility is more than
the gain as shown by the shaded area.
Hence, we may conclude that the consumer
will get maximurn satisfaction and will be
 limitations
• Quantitative Measurement of Utility:
Utility represents the feelings of satisfaction. It is the state
of mind. We have a hypothetical measurement of utility.
Actually, it is impossible to measure and compare the
marginal utilities of different things.
 Customs:
Consumer spends his income on the commodities
possessing less utility due to customs and traditions. Here,
the assumption of this law that every prudent consumer
maximizes his satisfaction by spending his income on the
commodities yielding more satisfaction is not proved.
 limitations
• Ignorance of the Consumer
Generally, a consumer does not bother about what he is
paying for a commodity. He may be paying more for a
commodity from one shop but does not visit another shop
where the same commodity may be available at less price.
• Indivisibility of Commodities:
It is not possible to equalize the marginal utilities of money
spent on those commodities which are indivisible like fridge,
television, furniture, car etc.
 limitations
• Marginal Utility of Money:
The marginal utility of money which a consumer
possesses is assumed to remain same during successive
purchase.
• Unlimited Resources:
This law has no application in case of free goods. We
have much more of these resources and do not require
any adjustment in expenditure because we pay no price.
Similarly, labor in less developed countries and capital in
developed countries are surplus whereas the law
assumes the resources as limited.