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Unit-3: Consumer Theory–Cardinal Utility Analysis

It is proved from the Fig. 3.5 that by spending 1 more on mango, the consumer gains 6 units of Notes
marginal utility as shown by ABCD area. Similarly, by spending 1 less on milk the consumer loses
8 units of marginal utility as shown by EFGH area. By this distribution of income the consumer will get
2 units of the total utility less. The consumer now gets only 46 units of the total utility while the earlier
spending manner will give him 48 units of the total utility.

3.10 Modern Statement of the Law

Modern economists call this law as Law of Proportionality. According to them a consumer gets the
maximum satisfaction when the ratio of marginal utilities derived from different goods and this
cost is equal. Assume that the price of an apple is 50 paisa and a consumer buys 10 apples. He gets 6th
utils from 10th apple. The marginal utility per rupee from the 10th apple and be calculated with the
help out—
MU
6
_____ a = = 12 Util per .
___

P
a 0.5
(Here MU = Marginal Utility of apples and P = Price of the apple per unit)
a a
Similarly, if the price of banana is 25 paisa per piece, as consumer buys 12 bananas. He gets 3 units of
the marginal utility from the number 12th banana. The marginal utility per rupee from the 12th banana
and be calculated with the help out following formula—
MU
3
_____ b = = 12 Util per .
____

P
b 0.25
(Here MU = Marginal Utility of Bananas and P = Price of the Bananas)
b
b
In the above example the consumer gets equal marginal utility per rupee from both the goods. In this
condition he will not stand to gain, if he spends one more in one commodity and one less in other
commodities. He would not like to make any change in his expenditure. Therefore, the consumer will
be in the state of maximum satisfaction under the following situation.
MU MU MU P
_____ a = _____ b or _____ a =
___
a

P
a P b MU b P b
In short, the consumer will buy so much quantity of different goods that will make their ratio of
their marginal utilities and price equal, by spending his income in this manner the consumer will
get maximum satisfaction. If a consumer is to buy “n” commodities, then by using the below written
formula, he will get maximum satisfaction out of his expenditure–
MU a = MU b = MU c ......... MU n
_____
_____
_____
_____

P
a P b P c P n
3.11 Importance of the Law
Importance of the Law is of great importance in economics. Robbins regards it as the basis of economics.
According to Marshall, “The application of the principle of equi-marginal utility extends over almost
every field of economic enquiry.”
For Example—
1. Consumption: Every consumer wants to get maximum satisfaction from his limited means.
As suggested by this law if a consumer spends his income on different commodities in such a way
that last unit of money spent on commodities yields him equal marginal utility then it will give
him maximum satisfaction.
2. Production: Every producer aims at earning maximum profit. In order to achieve its satisfaction a
producer has to utilize different factors of production such as land, labor, capital, etc. in such a manner
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