How is the Law of “Equi-marginal utility” helpful in maximizing the utility of a consumer?
INTRODUCTION OF LAW OF EQUI-MARGINAL UTILITY
We know that the wants of every man are unlimited. Wants arise again and again but man has limited means (income) to fulfill his wants and means have alternative uses. Thus, man always faces the problem of distribution of limited means of alternative uses, on his wants; so that, he may get maximum satisfaction (or utility). Law of Equi-Marginal Utility presents the solution to this problem. This law states that if a person, wishes to get maximum satisfaction from his income, he should spend his income on different items, in such a way that the utility of the last unit of money spent on each commodity, should be equal or almost equal. This law of consumption was propounded by a French Economist, H. H. Gossen in 1854 and it is also known as the Second Law of Gossen.
DIFFERENT NAMES OF THE LAW
The Law of Equi-marginal utility is known with several names, such as; Law of Substitution, Law of Indifference, Law of Proportionality, Law of economy, etc.
ASSUMPTIONS OF THE LAW
The assumptions of this law are as follows
- Man (Consumer) is a rational being and his aim is to get maximum satisfaction.
- The marginal utility of money remains the same (equal).
- Consumer spends his money in small quantities.
- Utility can be measured in the form of money.
Definition of Law of Equi-marginal Utility
According to Gossen
It is impossible to gratify all wants to the point of satisfaction. It is necessary, in order to obtain maximum satisfaction, to discontinue the satisfaction of different wants at a point at which their intensity has become equal.
EXPLANATION OF THE LAW
Law of Equi-marginal utility has three main basis
- Wants of human (consumer) are unlimited.
- Man has limited means but these means can be used alternatively.
- Every person wants to get maximum satisfaction (utility) from his limited means.
According to the law of Diminishing Marginal Utility, consuming commodity continuously one by one; a consumer gets the utility at a diminishing rate from each next unit. So, when the consumer spends, his limited income, on different heads, to get maximum satisfaction, he compares the utility of successive units of different heads and replaces the commodity that gives less utility with the commodity that gives utility and this replacement continues, until the marginal utility becomes equal.
This law is highly criticized by some of the economists, but its importance is also acknowledged by many of them.