LAW OF EQUI-MARGINAL UTILITY

 

 

LAW OF EQUIMARGINAL UTILITY
PRINCIPLE OF ECONOMICS/MICRO ECONOMICS

DR. SHASHI AGGARWAL

LAW OF EQUIMARGINAL UTILITY

MEANING OF LAW OF EQUIMARGINAL UTILITY

FIRST GIVEN BY A FRENCH ENGINEER H.H GOSSEN. ALSO KNOWN AS “ GOSSEN’S SECOND LAW” THE LAW STATES THAT IN ORDER 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.

LET US UNDERSTAND LAW

DIFFERENT NAMES

I.        LEFTWITCH REFERS TO THE GENERAL PRINCIPLE FOR THE MAXIMUM SATISFACTION OF CONSUMER’S SATISFACTION

II.        PROF HIBDON CALLED IT THE LAW OF RATIONAL CONSUMER. A RATIONAL CONSUMER IS ONE WHO WANTS TO GET MMAXIMUM SATISFACTION

III.        LORD ROBBBINS CALLED IT LAW OF ECONOMICS AS IT APPLIES TO ALL SECTIONS OF THE STUDY OF ECONOMICS

 

 

DEFINITION

DR. MARSHALL “ IF A PERSON 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.”

LISPY HAS STATED THIS LAW IN TERMS OF MONEY WHICH HAS SEVERAL USES

“ THE HOUSEHOLD MAXIMIZING UTILITY WILL SO ALLOCATE ITS EXPENDITURE BETWEEN COMMODITIES IN SUCH A WAY THAT THE UTILITY OF THE LAST PENNY SPENT ON EACH IS EQUAL

MODERN DEFINITION

MODERN ECONOMIST ALSO CALL IT AS “ LAW OF PROPORTIONALITY". ACCORDING TO THEM A PERSON GETS MAXIMUM SATISFACTION WHEN THE WEIGHED UTILITIES ARE EQUAL. IN OTHER WORDS, WHEN THE MARGINAL UTILITY OF ONE COMMODITY DIVIDED BY ITS PRICE AND MARGINAL UTILITY OF THE OTHER COMMODITY DIVIDED BY ITS PRICE ARE EQUAL.

(MU OF GOOD A)/PRICE OF A = ( MU OF GOOD B)/PRICE OF B=

=MU OF GOOD C/PRICE OF C -------AND SO ON

SUPPOSE PRICE OF APPLE IS 50 PAISE AND HE BUDYS 10 AND APPLES AND TENTH APPLE HE DERIVED 6 UTILS

6/.50= 12

PRICE OF BANANA IS .25 PAISE AND BUYS 12 BANANAS AND LAST UNIT GIVES HIM3

3/.25= 12

 

ASSUMPTIONS

1. CARDINAL MEASUREMENT OF UTILITY IS POSSIBLE
2. MARGINAL UTILITY OF MONEY IS CONSTANT
3. CONSUMER IS ALWAYS RATIONAL
4. NO CHANGE IN INCOME,HABITS,TASTE FASHION AND PRICE OF GOODS
5. COMMODITIES ARE DIVISIBLE IN SMALL UNITS
6. CONSUMPTION TAKES PLACE IN DEFINED PERIOD
7. THE UTILITIES OF GOODS ARE INDEPENDENT

EXPLANATION

LAW OF EQUIMARGINAL UTILITY

 

CRITICISM

      I.        CONSUMER IS NOT ALWAYS RATIONAL

    II.        CONSUMER IS NOT ALWAYS CALCULATING

   III.        NON AVAILABILITY OF CERTAIN GOODS

   IV.        INFLUENCE OF FASHION, CUSTOMS AND HABITS

    V.        INDIVISIBILITY OF GOODS

   VI.        CRITICISM

 VII.        INDEFINITE BUDGET PERIOD

VIII.        UTILITY IS NOT MEASURABLE

   IX.        MU OF MONEY DOES NOT REMAIN CONSTANT

    X.        IGNORANCE OF THE CONSUMER

   XI.        COMPLEMENTARY GOODS NOT APPLICABLE

 

IMPORTANCE

1.       I.        CONSUMPTION
2.     II.        PRODUCTION
3.    III.        EXCHANGE
4.    IV.        DISTRIBUTION
5.     V.        PUBLIC FINANCE
6.    VI.        DISTRIBUTION OF ASSETS

CONSUMPTION

PRODUCTION

 

EXCHANGE

 

DISTRIBUTION

 

PUBLIC FINANCE

 

DISTRIBUTION BETWEEN SAVING AND CONSUMPTION

 

OPTIMUM DISTRIBUTION OF COMMODITIES

 

DISTRIBUTION OF ASSETS