The law of the Equi-marginal utility:
1. The law of diminishing marginal utility is applicable only to the want of a single commodity.
2. The law of equi – marginal utility explains the behavior of a consumer when he consumer more than one commodity.
3. Wants are unlimited but the income which is available are limited.
4. This law explains how the consumer spends his limited income on various commodities to get maximum satisfaction.
5. Law of Equi-Marginal Utility is also known as the law of substitution.
6. “The law of consumer’s equilibrium ”
7. “Gossen’s second law ” and “ The law of maximum satisfaction”.
Definition: Marshall states the law as, “If a person has a thing which he can put to several uses, he will distribute it among these uses in such a way that it has the same marginal utility in all. For, if it had a greater marginal utility in one use than another he would gain by taking away some of it from the second use and applying it to first”.
Assumption:
1. The consumer is rational in the sense that he wants to get maximum satisfaction.
2. The utility of each commodity is measurable in cardinal numbers.
3. The marginal utility of money remains constant.
4. The income of the consumer is given. ‘
5. There is perfect competition in the market.
6. The prices of the commodities are given.
7. The law of diminishing marginal utility operates.
Illustration: This law can be illustrated with the help of table. Let us assume that the consumer has a given income of Rs 11. He wants to spend this entire income [i.e. Rs 11] on Apple and Orange. The price of an Apple and the price of an orange is Rs 1 each.
If the consumer wants to attain maximum utility, he should buy 6 units of apples and 5 units of oranges, so that she can get [92 + 58] = 150 units. No other combination of Apple and Orange can give higher than 150 utilities.
Diagrammatic Illustration: In the diagram, X – axis represents the amount of money spent and Y axis represents the marginal utilities of Apple and Orange respectively.
If the consumer spends Rs 6 on Apple and Rs 5 on Orange, the marginal utilities of both are equal, i.e. AA1 = BB1 [4 = 4], Hence, he gets maximum utility.
Criticisms:
1. In practice, utility cannot be measured, only be felt.
2. This law cannot be applied to durable goods.
