Theory of Consumer Behavior

Law of Equi-Marginal Utility

Law of Equi-Marginal Utility explains the relation between the consumption of two or more products and what combination of consumption these products will give optimum satisfaction. Marginal Utility is the additional satisfaction gained by consuming one more unit of a commodity. Let’s try and understand.

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Marginal Utility

How will you react if you get the same food to eat, over and over? Will you be happy? No! How will you feel if you see the same movie again and again? Bored!! Right?

Suppose you want to see an exhibition. For that, you have to take either a cab or any other public transport. Which option will you choose? You have limited money. The fare of the cab is double of that of the government bus.

Which option will you choose? Surely you will go for public transport. The concept of saving money and proper utilization of capital is the basis of marginal utility and the law of equal-marginal utility. Let us start.

In simple words, it is the additional satisfaction gained by the consumption of one more unit of a commodity. It is the approximate change in the total utility resulting from a one-unit change in the consumption of the commodity. It decreases with each additional increase in the consumption of a good. You will think how?

Suppose you eat one chocolate bar. How will you feel? Happy, Right? Suppose you eat another bar. Are you happy still? Maybe. If you go for another one, is the feeling the same? No. now you don’t feel happy. Moreover, you start to feel a little sick. So as the unit of the same item goes on increasing, the marginal utility goes on diminishing.

Law of Diminishing Marginal Utility

This law explains the relation between utility and quantity of a commodity. It states that as consumption increases more and more, the marginal utility will be less and less.

Assumptions of Law of Equi-Marginal Utility

  • Units of goods are homogenous.
  • No time gap between the consumption of the different units.
  • Tastes, fashion, preferences, and priorities remain unchanged.
  • Consumer aims at maximum satisfaction.
  • Consumer’s income is fixed and limited.

Types of Marginal Utility

Based on the relationship between the total and the Marginal Utility, there are three types of marginal utility.

Positive

The marginal utility is positive when the consumption of an additional unit of a product results in the increase in the total utility. Getting a coupon of free hair spa is its example.

Negative

It is negative when the consumption of an additional unit of a product results in the decrease in the total utility. Taking more vitamin supplements or overtake of some medicine is its example.

Zero

It is zero when the consumption of an additional unit of a product results in no change in the total utility. Getting two copies of the same novel is one of the examples of zero marginal utility.

Suppose we have data for the marginal and the total utility for different units of ice creams. Let us see the relation between the two.

Units Total Utility Marginal Utility
1 20 20
2 35 15
3 45 10
4 52 7
5 55 3
6 55 0
7 52 -2
8 47 -5
9 36 -11
10 20 -16

 

marginal utility

 

Law of Equi-Marginal Utility

This law is based on the principle of obtaining maximum satisfaction from a limited income. It explains the behavior of a consumer when he consumes more than one commodity.

The law states that a consumer should spend his limited income on different commodities in such a way that the last rupee spent on each commodity yield him equal marginal utility in order to get maximum satisfaction.

Suppose there are different commodities like A, B, …, N. A consumer will get the maximum satisfaction in the case of equilibrium i.e.,

MU/ PA = MU/ PB = … = MU/ PN

Where MU’s are the marginal utilities for the commodities and P’s are the prices of the commodities.

 

Assumptions of the Law

  • There is no change in the price of the goods or services.
  • The consumer has a fixed income.
  • The marginal utility of money is constant.
  • A consumer has perfect knowledge of utility.
  • Consumer tries to have maximum satisfaction.
  • The utility is measurable in cardinal terms.
  • There are substitutes for goods.
  • A consumer has many wants.

Limitation of the Law

There are some limitations to this law. They are

  • The law is not applicable in case of knowledge. Reading books provides more knowledge and has more utility.
  • This law is not applicable in case of fashion and customs.
  • This law is not applicable for very low income.
  • There is no measurement of utility.
  • Not all consumer care for variety.
  • The law fails when there are no choices available for the good.
  • The law fails in case of frequent price change.

Importance of the Law

  • This law is helpful in the field of production. A producer has limited resources and tries to get maximum profit.
  • This law is helpful in the field of exchange. The exchange is of anything like some goods, wealth, trade, import, and export.
  • It is applicable to public finance.
  • The law is useful for workers in allocating the time between the work and rest.
  • It is useful in case of saving and spending.
  • It is useful to look for substitution in case of price rise.

 

Solved Example for You

Question: Choose the correct alternative.

The marginal utility curve is …..

  1. Horizontal
  2. Vertical
  3. Upward Sloping
  4. Downward Sloping

Solution: 4. Downward Sloping

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