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Monday, 9 May 2011

Explain the Law of equi marginal utility with the help of schedule and diagram



Consumer behavior through Utility approach :-
It is the desire of every consumer that he wants to get maximum satisfaction from his limited resources. He can solve this problem if he spends his income in such a way that the last rupee spent on each item gives him the same amount of satisfaction. It is called the law of equi marginal utility.

R.G.Lipsey Says, " The household maximizing is utility will allocate his expenditures between commodities in such a way that the utility of the last penny spent on each is equal."

Every consumer will substitute the more useful for the less useful thing. This law is also known as the law of substitution. It is called the law of Equi-Marginal Utility because it is only law by which the marginal utilities have been equalized through the process of substitution. This law can be explained with the help of following schedule, assuming that our consumer has only Rs. 5/- to spend. Further it is assumed that there are two commodities Apple and Orange.




According to this schedule if one consumer spends his Rs. 5/- on one thing then he will get only 30 or 20 units of satisfaction. To get maximum satisfaction a consumer will spend Rs. 3/- on Apple and Rs. 2/- on Orange. Because in this way the total amount of utility will be maximum.
When a consumer will spend Rs. 3/- on Apple he will get = 10 + 8 + 6 = 24
By spending two rupees on Oranges he will get = 8 + 6 = 14
Total amount of satisfaction will be 24 + 14 = 38

If he will adopt any other method, he would not get such amount of utility.So we find that when the marginal utilities ( 6 = 6 ) are equal the total utility is maximum. No combination will give him more satisfaction except this one.


EXPLANATION :- In this diagram MM' is the marginal utility curve of Apple. If consumer spends Rs. 3/- on Apple. The 3rd rupees utility is FG, KK' the marginal utility curve of orange. The last rupee utility is HJ. Both the marginal utilities FG = HJ.

LIMITATIONS OF THE LAW OF EQUI MARGINAL UTILITY

1. Unmeasurable concept :-
The concept of utility is unmeasurable so it is very difficult to behave according to the law.

2. Carelessness :-
Sometimes due to ignorance people do not obtain the maximum advantage by equating the marginal utilities.

3. Indivisible units :-
If the unit of expenditure is indivisible then this law will not operate.

4. Customs :-
People are slave of customs and traditions, so they use the goods like gold even there is less utility.

5. Freedom of choice :-
If there is no perfect freedom to choose between various commodities, then the law will not operate.

28 comments:

rockr,  26 July 2011 04:11  

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Anonymous,  17 December 2011 11:03  

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Anonymous,  20 January 2012 09:16  

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Anonymous,  7 February 2012 02:09  

very helpfull.......thanx alot.

Anonymous,  9 February 2012 06:31  

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Anonymous,  26 February 2012 01:47  

very impressive

Anonymous,  2 April 2012 10:57  

very good article, helped me a lot!!!

Harsh 24 September 2012 12:28  

helped alot for preparation of my exams... so thnx..

Harsh 24 September 2012 12:31  

helped alot for preparing my exam....so thnx

Anonymous,  9 May 2013 00:24  

Thanks alot.

Anonymous,  15 May 2013 21:07  

thank you sir for providing information.....thanks alot

Anonymous,  22 May 2013 23:39  

help in assignment

Students of Virtual University of Pakistan 22 June 2013 09:37  

please change your text color i'm leaving this site you know why, because of text color.

Anonymous,  26 July 2013 09:23  

Its nice but CPT study material provides good knowledge for this and in a better presentation as well as in deep!

Anonymous,  18 August 2013 21:10  

I think i start to love economics!! Thanks!

Anonymous,  4 September 2013 11:55  

i find it very helpful for me. Such kind of simple explanations help a lot while better understanding the crux of the topic.

Anonymous,  14 October 2013 03:41  

thanx for the lovely explanation
















Anonymous,  24 November 2013 21:46  

awesome

shahzeb,  8 February 2014 11:54  

Awosome..helped alot...thanx

jawad tareen 9 February 2014 00:26  

it was pretty helpful,,,thanks for that,,,,,
But what we should do when there is 3 commodities,,for example there is banana with then??explain plzz

Shubham Bhujbal,  2 April 2014 08:22  

Gr8...finally i understand
nice explanation

Anonymous,  12 April 2014 22:28  

The law of equi marginal utility is used for two commodity case only.

Anonymous,  16 April 2014 23:46  

please,
give the Limitations with Examples than you

Rohullah Omarkhel 13 May 2014 11:27  

this is what i get my help .... thank you so much
thank you for the help .

Anonymous,  1 June 2014 08:18  

What a oxymoron, what's wrong with text color????

royo ronam 10 July 2014 12:09  

THANK YOU SO MUCH!!!!!

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