Gossen's second law explained with diagram, it also explains the consumer equilibrium under cardinal utility analysis

1. LAW OF EQUI-
MARGINAL
UTILITY
NASIYA V K

2. Introduction
◦ The idea of equi-marginal principle was first mentioned by H.H.Gossen (1810-1858) of Germany. Hence
it is called Gossen's second Law. Alfred Marshall made significant refinements of this law in his
'Principles of Economics’.
◦ The law of equi-marginal utility explains the behaviour of a consumer when he consumers more than one
commodity.
◦ This law explains how the consumer spends his limited income on various commodities to get maximum
satisfaction. The law of equi-marginal utility is also known as the law of substitution or the law of
maximum satisfaction.

3. Assumptions
◦ 1. The consumer is rational so he wants to get maximum satisfaction.
◦ 2. The utility of each commodity is measurable.
◦ 3. The marginal utility of money remains constant.
◦ 4. The income of the consumer is given.
◦ 5. The prices of the commodities are given.
◦ 6. The law is based on the law of diminishing marginal utility.

4. ◦ According to the law of equi-marginal utility, the consumer will be in equilibrium at the point where the
utility derived from the last rupee spent on each is equal.
◦ The law states that a consumer should spend his limited income on different commodities in such a way that
the last rupee spent on each commodity yield him equal marginal utility in order to get maximum satisfaction.
◦ Suppose there are different commodities like A, B, …, N. A consumer will get the maximum satisfaction in the
case of equilibrium i.e.,
◦ MUA / PA = MUB / PB = … = MUN / PN
◦ Where MU’s are the marginal utilities for the commodities and P’s are the prices of the commodities.

5. Commodity A
(Per Rupee)
MU (Utils) Commodity B
(per Rupee)
MU(Utils)
1 40 1 30
2 35 2 26
3 30 3 24
4 25 4 20
5 20 5 16
6 15 6 12
7 10 7 8

7. Importance of the Law
◦ This law is helpful in the field of production. A producer has limited resources and tries to get maximum profit.
◦ This law is helpful in the field of exchange. The exchange is of anything like some goods, wealth, trade, import,
and export.
◦ It is applicable to public finance.
◦ The law is useful for workers in allocating the time between the work and rest.
◦ It is useful in case of saving and spending.
◦ It is useful to look for substitution in case of price rise.

8. ◦Thank you