eqi-marginal-utility.pptx
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This document discusses the law of equi-marginal utility, which states that a rational consumer will allocate their limited income across different goods in a way that equalizes the marginal utility per rupee spent. It provides an example showing how a consumer maximizes total utility by purchasing combinations of goods X and Y until their marginal utility per rupee is equal. The law has assumptions of rational behavior, full market knowledge, cardinal utility measurement, and substitutable divisible goods. Limitations are the assumptions of cardinal utility and rationality, as well as inability to apply to indivisible goods.
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Law of equi marginal utility
The law of equi-marginal utility states that consumers will allocate their limited income across different goods in a way that equalizes the marginal utility per rupee spent. Specifically, the traditional statement is that a consumer will spend their money such that the last rupee spent on each good yields equal satisfaction. Alternatively, the modern statement is that marginal utility divided by price will be equal across goods, allowing consumers to maximize total utility. This law assumes consumers can purchase multiple goods and aims to explain how consumers allocate resources to maximize satisfaction given budget constraints.
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The document discusses the law of equi-marginal utility. It states that according to this law, when income is spent on two or more goods, a consumer will allocate their income in such a way that the marginal utility from the last unit of each good is equal. This will maximize their total utility. The document provides an example using a table and graph to illustrate how when marginal utilities from goods A and B are equal at 6 units each, the total utility is maximized at 38 units. It notes some assumptions and limitations of applying the law, such as utility being difficult to measure precisely.
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The Law of Equi-Marginal Utility states that consumers will allocate their limited income across different goods in a way that equalizes the marginal utility per rupee spent. Specifically:
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2) They will continue reallocating spending until marginal utility per rupee is equal across all goods, reaching an equilibrium that maximizes total satisfaction.
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- 1. z Dr. Pooja Singh Assistant Professor, Department of Economics, School of Arts, Humanities And Social Science, Chhatrapati Shahu Ji Maharaj University, Kanpur Law of Equi-Marginal Utility
- 2. Law of Equi-Marginal Utility Propounded by Hermann Heinrich Gossen (1810-1858) Also Known as Gossen’s Second Law Also Known as Law of Substitution or Law of Mximum Satisfaction Law of Equi-Marginal Utility Dr. Pooja Singh, Assistant Professor, Department of Economics, School of Arts, Humanities And Social Science, Chhatrapati Shahu Ji Maharaj University, Kanpur A B Marginal Utility from A Marginal Utility from B
- 3. • According to Marshall, 'If a person has a thing which can be put to several uses, he will distribute it among these uses in such a way that it has the same marginal utility in all’. • A consumer, generally is confronted with the problem of buying from among several goods and services, given his limited income. • This law explains the behavior of a consumer in distributing his limited income among various goods and services as to obtain maximum satisfaction. MUX PX = MUY PY Where , MUx = Marginal Utility of Good x MUy= Marginal Utility of Good y Px = Price of Good x Py = Price of Good y MUm = Marginal Utility of Money Dr. Pooja Singh, Assistant Professor, Department of Economics, School of Arts, Humanities And Social Science, Chhatrapati Shahu Ji Maharaj University, Kanpur Law of Equi-Marginal Utility = MUm
- 4. • Assumptions- 1) The consumer should behave rationally. 2) He has full knowledge about the commodities i.e their attributes, price, etc. in the market. 3) Utility is measurable cardinally in terms of utils. 4) Commodities that are chosen are divisible and substitutable. Law of Equi-Marginal Utility Dr. Pooja Singh, Assistant Professor, Department of Economics, School of Arts, Humanities And Social Science, Chhatrapati Shahu Ji Maharaj University, Kanpur
- 5. For Example: A man purchases two goods X and Y whose prices are PX and PY, respectively. • By purchasing these combinations of X and Y (= Rs. 4 x 5 + Rs. 5 x 3) gets maximum satisfaction [10 + 9 + 8 + 7 + 6] + [11 + 10 + 6] = 67 units. • Purchase of any other combination other than this involves lower volume of satisfaction. Unit Consumed MUx MUy 1 40 55 2 36 50 3 32 30 4 28 20 5 24 15 6 20 5 Let Px= 4 Let Py= 5 Law of Equi-Marginal Utility Unit Consumed MUX PX MUY PY 1 10 11 2 9 10 3 8 6 4 7 4 5 6 3 6 5 1 Dr. Pooja Singh, Assistant Professor, Department of Economics, School of Arts, Humanities And Social Science, Chhatrapati Shahu Ji Maharaj University, Kanpur
- 6. • consumer maximizes his total utility by spending OD amount on good X and O’D amount on good Y. • the consumer equalizes marginal utilities per rupee spent on X and Y at point E (i.e., MUX/PX = MUY/PY = ED). • No other combination will give greater satisfaction. Law of Equi-Marginal Utility Dr. Pooja Singh, Assistant Professor, Department of Economics, School of Arts, Humanities And Social Science, Chhatrapati Shahu Ji Maharaj University, Kanpur
- 7. Limitations- • The law of equi-marginal utility is based on the measurability of utility in cardinal numbers. • This law assumes that the consumer acts rationally. • No consumer, in fact, purchases commodity in accordance with this principle of substitution. • This law cannot be applied in the case of indivisible commodities like motor car, refrigerator, etc. Since these commodities are not divisible into smaller units, the law may seem to be inoperative.
- 8. References • Dwivedi D N, Managerial Economics, Vikas Publishing House Pvt. Ltd, 2006