Define Law of Equi- Marginal Utility
Define Law of Equi- Marginal Utility
A very important fact of human life is the scarcity of resources and incomes. We can not find a single person who feels that his income is enough to satisfy all of his wants. Thus it is natural that people want to avoid wastage and try to spend their income in such way that they get maximum total utility.
For this purpose, they have to compare the utilities of various commodities and use them according to the principle of Equi-Marginal. This principle or law can be defined as “total utility from a given amount is maximum when it is spent on various goods in such a way that marginal utility of money spent on each good becomes equal”.
(adsbygoogle = window.adsbygoogle || []).push({});
A consumer in order to get the maximum satisfaction from his limited resources compares not only the utility of a particular commodity and price but also the utility of the other commodities which he can buy with his scarce resources.
If he finds that a particular expenditure in one use is yielding less utility then that of other, he will try to transfer units of expenditure form the commodity yielding less marginal utility to commodity yielding higher marginal utility. If he feels that by withdrawn a rupee from one good and spending on some other he can increase total utility he will certainly do so. He substitutes goods of greater utility for goods of lesser utility till he gets the maximum satisfaction. When consumer succeeds in getting maximum utility he fully satisfied and he no desire to make any change in his purchase plan. So it is called consumer equilibrium.
Assumption of law.
- The consumer has a fixed amount to spend A& B
- He can purchase only two goods say Apple & Banana.
- The marginal utility of the two goods is given.
- Prices of apple and banana is Rs.1 per unit.
|
Rupees
|
MU of A
|
MU of B
|
|
1
|
28
|
20
|
|
2
|
24
|
18
|
|
3
|
20
|
16
|
|
4
|
16
|
14
|
|
5
|
12
|
12
|
|
6
|
8
|
10
|
|
7
|
4
|
8
|
|
8
|
112
|
98
|
From the table, we see that initially, the consumer should spend on commodity A because its MU is greater. When he has spent four rupees on A he finds that it is now better to spend on B. In this way by comparing the MU of the two co, he goes on spending the amount. When he spent 4 on A & 3 on B the MU becomes equal and total utilities are 142 which is maximum. If he spends the income in any other way then MU become unequal and T.U will be less then 142. The T.U will be maximum only when marginal utilities of two goods purchased are equal.
Practical applications
- Its application in public finance.
- Guidance for consumers
- Guidance for producers.
- Guides in pricing factors of production.
———-
For Correction and Improvements please use the comments section below.
(adsbygoogle = window.adsbygoogle || []).push({});
Naeem Javid Muhammad Hassani is working as Conservator of Forests in Balochistan Forest & Wildlife Department (BFWD). He is the CEO of Tech Urdu (techurdu.net) Forestrypedia (forestrypedia.com), All Pak Notifications (allpaknotifications.com), Essayspedia, etc & their YouTube Channels). He is an Environmentalist, Blogger, YouTuber, Developer & Vlogger.