law of equi -marginal utility

Gossen's second law explained with diagram, it also explains the consumer equilibrium under cardinal utility analysis

1. LAW OF EQUI-MARGINAL UTILITY NASIYA V K

2. Introduction The idea of equi-marginal principle was first mentioned by H.H.Gossen (1810-1858) of Germany. Hence it is called Gossen's second Law. Alfred Marshall made significant refinements of this law in his ' Principles of Economics ’. The law of equi-marginal utility explains the behaviour of a consumer when he consumers more than one commodity.  This law explains how the consumer spends his limited income on various commodities to get maximum satisfaction. The law of equi-marginal utility is also known as the law of substitution or the law of maximum satisfaction.

3. Assumptions 1.        The consumer is rational so he wants to get maximum satisfaction. 2.        The utility of each commodity is measurable. 3.        The marginal utility of money remains constant. 4.        The income of the consumer is given. 5.        The prices of the commodities are given.  6.        The law is based on the law of diminishing marginal utility.

4. According to the law of equi-marginal utility, the consumer will be in equilibrium at the point where the utility derived from the last rupee spent on each is equal. 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 A  / P A  = MU B  / P B  = … = MU N  / P N Where MU’s are the marginal utilities for the commodities and P’s are the prices of the commodities.

5. Commodity A (Per Rupee) MU (Utils) Commodity B (per Rupee) MU(Utils) 1 40 1 30 2 35 2 26 3 30 3 24 4 25 4 20 5 20 5 16 6 15 6 12 7 10 7 8

6. 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.

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