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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.