ERUPA SCIENCE & COMMERECE ACADMY
Economics Notes
Q. No. 4: Explain the Law of EQUI Marginal Utility. Also discuss its limitations. Answer: INTRODUCTION: The basic economic problem is that human wants are unlimited while resources are limited. Every rational consumer wants to maximize his total utility with the help of limited incomes. This law guides the consumer how he can get maximum satisfaction. Consumer always makes choice between more important and less important wants. Total utility will maximum when marginal utility derived form each good is equal. STATEMENT OF THE LAW: Other things being constant when equilibrium position reaches
MUs of all commodities purchased are exactly equal. According to ALFRED MARSHAL: Other things remaining same if a person has a thing he can put to several uses, he will distribute it among those uses in such a way that it has the same marginal utility in all. DIFFERENT NAMES: The different names of this law are as follows: Law of Substitutes Law of Maximum Satisfaction Law of Indifference Law of Economy of Expenditures ASSUMPTIONS: The law of equi-marginal utility holds under the following assumptions. 1: Consumer has a given income Rs. 5/Erupa Academy Composed & Designed By: Basit butt
ERUPA SCIENCE & COMMERECE ACADMY
Economics Notes
2: Consumer want to purchase two commodities A and B. 3: It is assumed that the price of commodity A and B are Rs. 1 each. 4: It is also assumed that utility can be measure in utils.
5: Consumer is rational. 6: The basic aim is to get maximum satisfaction. 7: It is assumed that commodities assumed by the consumer are subject to the law of diminishing marginal utility. Units of Money 1 2 3 4 5 MUA 30 25 20 15 10 100 MUB 25 20 15 10 5 75
EXPLANATION: From the above schedule it is clear that if consumer spends whole of his income on commodity A, total utility is 100. If consumer spends all of his income on commodity B, he gets 75 as total utility. But if consumer spends 3 units of money on commodity A and 2 units of money on commodity B his total utility will maximum, because MU of last unit spends on each commodity is equal if consumer spends hi income except this, his total satisfaction will not be maximum. The maximum possible combinations are as follows:
Total utility by spending 1 unit of money on commodity A and 4 units on Commodity B is. (30) + (25 + 20 + 15 + 10) = 100
Total utility by spending Rs. 4 on A and Rs. 1 on B. (30 + 25 + 20 + 15) + (25) = 115
Total Utility by spending Rs. 3 on A and Rs. 2 on B. (30 + 25 + 20) + (25 + 20) = 120 Total Utility by spending Rs. 2 on A and Rs. 3 on B. (30 + 25) + (25 + 20 + 15) = 115
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ERUPA SCIENCE & COMMERECE ACADMY
Economics Notes
It concludes that total utility is maximum only when consumer spends 3 units on A and 2 units on B Maximum satisfaction is 120. DIAGRAM:
Y axis
Y axis
30 25
30
G L O S S
1 2 3 4 5
25
H G A I N
1 2 3 4 5
MUA 20
15 10 05 00
MUB 20
15 10 05 X axis 00
MUA
MUB X axis
Units of Money
Units of Money
EXPLANATION: In this diagram, we measure units of money on x-axis and MU on y-axis. MUA is the curve of marginal utility for commodity A while MUB is the curve of marginal utility for commodity B. consumer gets maximum satisfaction by spending 3 units of money on A and 2 units of money on commodity B. if he will not follow the law and spends 2 units on A then he will lose MU equals to 20. by spending units on B he will gain MU of 15. in this situation loss in utility is more than the gain in utility. Therefore consumer will not gain maximum satisfaction. Only the combination of 3 units of money for A and 2 units of Money on B gives maximum satisfaction to the consumer. LIMITATIONS: The following are the limitations of this law. 1: Utility is Immeasurable: Utility is a mental phenomenon. It cannot be measure in numerical values. So it is very difficult to follow this law. 2: Indivisibility of Goods: Some of the goods are not divisible. This law is not applicable in case of indivisibility of goods.
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ERUPA SCIENCE & COMMERECE ACADMY
Economics Notes
3: Ignorance of Consumer: Sometimes consumer is not aware about the uses of a commodity. There no substitutions takes place and the law does not hold. 4: Careless of Consumer: Sometimes consumer remains careless while spending money ion different commodities. In this way he cannot maximize his utility. 5: Irrational Behaviour: The law holds only when consumer is rational. In case of irrational purchases, law does not hold. 6: Customs and Behaviour: Sometimes consumer consumes goods according to customs and fashion. In such cases consumer does not equalize marginal utilities. 7: Time Period: Some goods are consumed before the expected time. And some are used more than the expected time. So the idea of utility becomes wrong. 8: Assumption are weak: This law is based on weak an questionable assumptions. For example, MU of money does not remain constant, utility is not measurable, income of consumer never remains same and taste of consumers always changing.
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