Law of Equi-Marginal Utility

Topics: Economics, Utility, Marginal utility Pages: 4 (1325 words) Published: September 28, 2012
Law of Equi Marginal Utility

According to this, a consumer is in equilibrium when he distributes his given money income among various goods in such a way that marginal utility derived from the last rupee spent on each good is the same. Assumptions

The main assumptions of the law of equi-marginal utility are as under: (1) Independent utilities. The marginal utilities of different commodities are independent of each other and diminishes with more and more purchases. (2) Constant marginal utility of money. The marginal utility of money remains constant to the consumer as he spends more and more of it on the purchases of goods. (3) Utility is cardinally measurable.

(4) Every consumer is rational in the purchase of goods.
(5) Limited money income. A consumer has limited amount of money income to spend. Definition and expLanation of the law:
The law of equi-marginal utility is simply an extension of the law of diminishing marginal utility to two or more than two commodities. The law of equi-marginal, is known, by various names. It is named as the Law of Substitution, the Law of Maximum Satisfaction, the Law of Indifference, the Proportionate Rule and the Gossen’s Second Law. every consumer has unlimited wants. However, the income at his disposal at any time is limited. The consumer is therefore, faced with a choice among many commodities that he can and would like to pay. He therefore, consciously or unconsciously compares the satisfaction which he obtains from the purchase of the commodity and the price which he pays for it. As he buys more and more of that comniodity, the utility of the successive units begins to diminish. He stops further purchase of the commodity at a point where the marginal utility of the commodity and its price are just equal. If he pushes the purchase further from his point of equilibrium, then the marginal utility of the commodity will be less than that of price and the household will be a loser. A consumer will be...
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