LAW OF
EQUI-MARGINAL
UTILITY
The Law of Substitution or The
Law of Maximum Satisfaction
TABLE OF CONTENTS
01 02
EXPLANATIO
DEFINITION N
03 04
LIMITATIONS IMPORTANCE
01
DEFINITION
The idea of equi-marginal principle was first
mentioned by [Link] (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 behavior of a consumer
when he consumers more than one commodity.
Wants are unlimited but the income which is
available to the consumers to satisfy all his wants is
limited. 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 or the principle of
proportionality between prices and marginal utility.
In the words of Prof.
Marshall, 'If a person has a
thing which can be put to
several uses, he will
distribute it among these
uses in such a way that it
has the same marginal
utility in all'.
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.
02
EXPLANATI
ON
EXPLANATION OF THE
LAW
TABLE
03
LIMITATION
S
LIMITATIONS OF THE LAW
The
Measurement
Indivisibility of Utility is not Indefinite
of Goods Possible Budget
Period
1 2 3 4 5
The Marginal Utilities are
Utility of Interdepende
Money is Not nt
Constant
LIMITATIONS
● The theory is weakened by the fact that many commodities like a car, a
house etc. are indivisible. In the case of indivisible goods, the law is not
applicable.
● The theory is based on the assumption that the marginal utility of
money is constant. But that is not really so.
● Marshall states that the price a consumer is willing to pay for a
commodity is equal to its marginal utility. But modern economists argue
that, if two persons are paying an equal price for given commodity, it
does not mean that both are getting the same level of utility. Thus utility
is a subjective concept, which cannot be measured, in quantitative
terms.
● This law assumes that commodities are independent and therefore their
marginal utilities are also independent. But in real life commodities are
either substitutes or complements. Their utilities are
therefore interdependent.
● According to Prof. K.E. Boulding, indefinite budget period is another
difficulty in the law. Normally the budget period is assumed to be a year.
04
IMPORTANC
E
IMPORTANCE OF THE LAW
01 02 03
It applies to It applies to Distribution of
consumption production Earnings
Between
Savings and
Consumption
04 05 06
It applies to It Applies to Expenditure
distribution Public Finance of Time
IMPORTANCE
Every rational human being wants to get maximum satisfaction with his limited means.
1 The consumer arranges his expenditure in such a way that, M U x/Px = M U y/Py = M
Uz/ Pz so that he will get maximum satisfaction
The aim of the producer is to get maximum output with least-cost, so that his profit will
2 be maximum. Towards this end, he will substitute one factor for another till MPl / Pl =
MPc / Pc = MPn / Pn
According to Marshall, a prudent person will endeavour to distribute his resources
between his present needs and future needs in such a way that the marginal utility of the
3
last rupee put in savings is equal to the marginal utility of the last rupee spent on
consumption.
The general theory of distribution involves the principle of substitution. In distribution, the
4 rewards to the various factors of production, that is their relative shares, are determined
by the principle of equi-marginal utility.
The principle of 'Maximum Social Advantage' as enunciated by Professors Hicks and
Dalton states that, the revenue should be distributed in such a way that the last unit of
5
expenditure on various programmes brings equal welfare, so that social welfare is
maximized.
Prof. Boulding relates Marshall's law of equi-marginal utility to the expenditures of limited
time, i.e. twenty-four hours. He states that a person should spend his limited time among
6
alternative uses such as reading; studying and gardening, in such a way that the marginal
utility from all these uses are equal.
REFERENCES
● Business Economics- D.D. Chaturvedi
● Micro Economics [Class 11] - Sandeep
Garg
● Subject Teacher- Dr. Suhasini Parashar
● Website-
[Link]
Of-Equi-Marginal-Utility---Definition,-
Explanation,-Importance,-
Criticism_1537/
THANKS!
Presentation made by:
Bhuvi Minocha
Roll No.: 125230013818
Section C
minochabhuvi@[Link]
+91 9711422212
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