LAW OF EQUI-MARGINAL UTILITY

This law is also known as the law of substitution. “The law implies that if a person has a thing which he can put to several uses, he will distribute it between those uses in such a way that it has the same marginal utility in all” (Marshall).

Assumptions

1. The consumer behaves rationally.

2. He has full knowledge about the commodities, their attributes, prices, etc., in the market.

3. Utility is measurable cardinally in terms of utils.

4. Commodities that are chosen are divisible and substitutable.

Explanation of the Law

Explanation of the Law
Given the income constraint, the consumer makes prudent decisions in his purchases such that the allocation so made ensures him maximum satisfaction. Let us assume that the consumer has got Rs. 25 to spend. He has the option of spending this amount on three vegetables viz., potato, tomato, and ridge gourd. The marginal utilities that are derived from the consumption of these vegetables and the amounts of money spent are presented in the table. The marginal utilities are derived from the consumption of three vegetables by spending a unit of money (each unit of money is equal to Rs. 5). The first unit of Rs. 5 on potato gives a marginal utility of 19 utils, the second unit 16 utils, third 14 utils, and so on. Now to maximize the satisfaction from the three vegetables the consumer has to spend Rs. 25 in such a way that the marginal utility of the last
unit of money is equal in all uses. Given the marginal utilities derived from the three vegetables, the consumer has to spend the first three units on tomato, one unit each on potato and ridge gourd respectively. The
total utility through this combination would be 100 (22+21+20+19+18). No other combination of vegetables gives as high as 100 utils. Diagrammatic representation is shown below.
Practical Importance of Law of Equi- Marginal Utility
1. Consumption: A rational consumer follows this law while planning his expenditure. He spends in such a way that marginal utility deriver from each unit of money gives nearly equal utility in the various goods he purchases.
2. Production: A rational producer allocates his limited resources among various possible enterprises in such a way that the marginal value product derived from each unit of resource on various enterprises is the same.
3. Marketing: The consumer should keep in mind that the marginal utility of the commodity and price of the commodities should be equal in purchasing the commodities from the markets. Thus this law guides the consumers to spend the given amount efficiently on different goods that provide utilities.
4. Distribution: The share of each factor of production is determined on the basis of marginal value productivity.
5. Prices: When the price of a commodity goes up in view of a shortfall in supply, the consumer prefers that commodity that is relatively less scarce. This preference of consumers brings down the price of the commodity.
Limitation of the Law of Equi- Marginal Utility
1) Ignorance: If a consumer is ignorant and blindly follows custom, he will may not make wrong use of money.
2) Inefficient organizer: The inefficient business organizer will finally achieve the best result from the land, labor, and capital that he employs.
3) Unlimited resources: When the resources are sample this law will be meaningless.
4) Hold of custom and fashion: If the purchase is strongly influenced by the customer and fashion he will not obtain maximum satisfaction.
5) Frequent changes in prices of different goods and services have occurred the observance of this law is difficult.


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