Definition and Statement of Law of Equi-Marginal Utility

Definition and Statement of Law of Equi-Marginal Utility

The law of equi-marginal utility is simply an extension of law of diminishing marginal utility to two or more than two commodities. In cardinal utility analysis, this law is stated by Lipsey in the following words:

” The household maximizing the utility is so allocate the expenditure between commodities that the utility of the last penny spent on each item is equal”.

As we know, every consumer has ultimate wants. However, his income in any time is limited. The consumer has to choose among many commodities that he can and would like to pay. He, therefore, consciously or unconsciously compares the satisfaction which he obtains from the purchase of the commodity and the price which he pays for it. If he thinks the utility of the commodity is greater or at-last equal to the loss of utility of money price, he buys that commodity.

As he buys more and more of that commodity, the utility of the successive units begins to diminish. He stops further purchase of the commodity at a point where the marginal utility of the commodity and its price are just equal. If he pushes the purchase further from his point of equilibrium, then the marginal utility of the commodity will be less than that of price and the household will be loser. A consumer will be in equilibrium with a single commodity symbolically.

A product consumer in order to get the maximum satisfaction from his limited means compares not only the utility of a particular commodity and the price but also the utility of other commodities which he can buy with his scarce resources. If he finds that a particular expenditure is yielding less marginal utility, he will try to transfer a unit of expenditure to another commodity for higher marginal utility. The consumer will reach his equilibrium position when it will not be possible for him to increase the total utility by uses. The position of equilibrium will be reached when the marginal utility will be equal to its price and the ratio of the prices of all goods is equal to the ratio of their marginal utilities.

The consumer will maximize total utility from his income when the utility from the last penny spent on each good is the same. Algebraically, this is:

MU_a / P_a = MU_b / P_b = MU_e/ P_e……….=MU_n / P_n

Here a,b,c…..n are various goods consumed.

Assumption of Law of Eqi-Marginal utility:

The main assumptions of the law of equi-marginal utility are as under.

1. Independent utilities. The marginal utilities of different commodities are independent of each other and diminish with more and more purchase.
2. Constant marginal utility of money. The marginal utility of money remains constant to the consumer as he spends more and more of it on the purchase of goods.
3. Utility is cardinally measurable. It is assumed that utility is a quantifiable entity. This means that a person can express the satisfaction derived from the consumption of a commodity in quantitative terms.
4. Every consumer is rational in the purchase of goods. Here we may take it that, a person would show a normal behavior in the purchase of goods.