LAW OF EQUI-MARGINAL UTILITY | CONSUMER’S EQUILIBRIUM UNDER THE LAW

What is the law of Equi-Marginal utility? As we know that there is one defect in the law of diminishing marginal utility. This is that it only explains the behaviour the consumer as a regarding whole. Therefore, a particular consumer commodity law of equi-marginal at each time utility. It does be not developed explain which is an extension of the law of diminishing marginal utility. This is used for maximizing total utility. The household maximizing its utility will allocate its income among commodities so that the utility of the last penny spent on each is equal. This law does not mean that a prudent consumer substitutes one item for the other in order to satisfy the same want e.g. tea and coffee.  It means that the consumer demands different items within his purchasing power and denies maximum utility from them. This is what every normal consumer desires.

EXPLANATION OF LAW OF EQUI-MARGINAL UTILITY WITH TABLE:

Let’s suppose that a hypothetical consumer hold these characteristics as well the basic features;-
(i)         He has Rs.5/=
(ii)        He wants to purchase oranges and 7-Up whose price is Re. 1 each
(iii)      Utility can be measured in utils or cardinal terms (e.g. 1,2,3… etc)

(iv)       Both the items of consumption are divisible in certain or suitable standard units consumption.

(v)        A consumer is a rational person!

Below are the utilities derived from the person’s consumption of oranges and 7-Up.?

LAW OF EUI-MARGINAL UTILITY

Units of Money (Rs.)Orange (M.U.)7-Up (M.U.)

 

1
2
3
4
5
25

20
10
05
15

20

15
10
05
00

Let us now study the table.
The consumer has Rs. 5 to spend and he wants to purchase these two items and derive maximum utility from them. Therefore, if he spends a certain amount of money on oranges. the rest he must spend on 7-Up
(i)         If he spends Re. I on oranges he will benefit 25 utils and from the remaining Rs. 4 on 7-Up, he will benefit a total of 50 utils (20 + 15 + 10 + 5). Hence the total utility of this expenditure will be 75 utils.
(ii)        If he spends Rs. 2 on oranges he will benefit 45 utils (25 + 20) and from the remaining Rs. 3 on 7-Up. he will benefit 45 utils (20 + 15 + 10). Ilea-ace tota! a utility will be 90 utils.
(iii)       If he spends Rs. 3 on oranges he will benefit 60 utils and from the remaining Rs. 2 on 7-Up he will benefit 35 utils (20 +15). Hence total utility will be 95 utils.
(iv)       If he spends Rs.4 on oranges he will benefit 70 utils and from the remaining Re. I on 7-Up he will benefit 20 utils. Hence, total utility will be 90 utils.
(v)        If he spends Rs. 5 on oranges he will benefit 75 utils and nothing from 7-Up! This is because he has spent all his money on oranges, which was not his intention, mainly because he wants to purchase two items and derive maximum utility from both.
Therefore, if the consumer? wants to benefit maximum satisfaction of both items and also wants to make full use of his purchasing power, it is advisable for him to take the third case, i.e. Rs. 3 on oranges and Rs. 2 on 7-Up. He will get a total utility 95 utils… maximum satisfaction! (which is more than in any other combination above). The following diagram shows rationality of the decision made by the consumer. In this case, his total utility will fall because marginal utilities of the goods are not equal. This is evident from the gain and loss of utility shown in the diagram. We find that the gain of utility by spending an extra rupee on oranges is less than the loss of utility from 7-Up. Therefore the difference between the two is the net loss in total utility.

CONSUMER’S EQUILIBRIUM UNDER THE LAW OF EQUI-MARGINAL UTILITY:

Until now we have studied two laws regarding marginal utility, the first being the actual law of marginal utility. In this law, we were made clear of the fact that the prudent consumer stops purchasing a commodity when the marginal utility of the commodity becomes equal to its price i.e. MU = P. However; in this point, we were only studying part of the human behaviour. The second law, which is the law of equi-marginal utility, studies the M. U. of all commodities being consumed which will give M. U. a= M. U. b= M. U.c… = M.U, n. (infinity).