Page 39 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes
Fig. 3.3

Y ( A ) Y ( B )
M P D
Marginal Utility M 3 1 2 Diminishing M.U. Price P 3 1 2 Demand Curve
M
P
M

O X O D
Q Q Q X
1 2 3 Q Q Q 3
2
1
Quantity U Quantity
Figure 3.3(A) represents marginal utility curve and Fig. 3.3(B) represents demand curve, DD (demand
curve) has been drawn with the help of marginal utility curve.

3.9 Law of Equi-Marginal Utility or Utility Analysis
and Consumer’s Equilibrium

Law of Equi-Marginal Utility is the second law of marginal utility analysis. This law points out how a
consumer gets maximum satisfaction out of his given expenditure on different goods. In 19th century,
this law concerning the expenditure of a consumer was first propounded by a French engineer, Gossen.
So this law is also known as “Second law of Gossen”. Dr. Marshall has called it “Law of Equi-Marginal
utility”. The law states that in order to get the maximum satisfaction a consumer should send the
limited income on different commodities in such a way that the last rupee spend on each commodity
yield him equal marginal utility. Economists have given different names to this law. Lewftwich
calls it “The General Principle for Maximisation of Consumer’s Satisfaction”. In simple words, it is also
known as Law of Maximum Satisfaction because a consumer by spending his income in accordance with
this law consumer gets maximum satisfaction. Prof. Hibdon has called it “law of rational consumer”.
A rational consumer using his rationality will spend his income strictly according to this law, so it is
also known as “Law of Substitution”. A consumer will go on substituting the goods yielding higher
marginal utility for the goods yielding lower marginal utility till the time the marginal utility of both the
goods become equal. Lord Robbin called it “Law of Economics” because it is applied to all the sections
of study of the economics such as production, consumption, exchange distribution and public finance.
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.
—Marshall
The law of equi-marginal utility states that to maximise utility, consumers must allocate their limited
income, among goods in such a way that marginal utilities per doller of demand from the last unit
consumed are equal among all goods.
—McConnell
A consumer gets maximum satisfaction when the ratio of marginal utilities of all commodities and
their prices is equal.
—Samuelson

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