Q.Explain the 'Law of Equi-Marginal Utility' in the analysis of consumer's equilibrium.
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Start your 14-day free trial to unlock the full solution →A consumer maximises satisfaction when the marginal utility per rupee is equal across all goods: MUx/Px = MUy/Py = ... = MU of money.
Meaning:
The law of equi-marginal utility (given by Marshall) explains how a rational consumer, spending a given money income on more than one commodity, distributes it among the different commodities so as to get maximum total satisfaction. It is also called the law of maximum satisfaction, the law of substitution, or Gossen's second law.
Statement of the law:
A consumer gets maximum total satisfaction when he allocates his income among different goods in such a way that the marginal utility of the last rupee spent on each good is the same — that is, the ratio of the marginal utility of each good to its price is equal for all goods, and equal to the marginal utility of money. In symbols, for two goods X and Y:
MUx / Px = MUy / Py = MU of money (MUm).
Explanation:
Suppose a consumer is spending income on goods X and Y. If MUx/Px is greater than MUy/Py, the consumer is getting more satisfaction per rupee from X than from Y. He will therefore buy more of X and less of Y. As he buys more of X, its marginal utility falls (law of diminishing marginal utility), and as he buys less of Y, the marginal utility of Y rises. This substitution continues until MUx/Px = MUy/Py. At this point no further transfer of expenditure can increase total satisfaction, so the consumer is in equilibrium.
Conditions for consumer's equilibrium under this law:
- MUx/Px = MUy/Py = ... = MU of money (the equi-marginal condition).
- The marginal utility must be diminishing (so that the equilibrium is one of maximum satisfaction). …
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