Law of Equi-Marginal Utility or Law of Maximum Satisfaction
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Law of Equi-Marginal Utility or Law of Maximum Satisfaction

“Law of Equi-Marginal Utility” or "Law of Maximum Satisfaction'" We all know that our wants are competitive. We have, therefore, constantly to make a choice between the more urgent and the less urgent wants. When we are weighing in our mind whether to buy a little more or a little less of a commodity, it seems that we are trying to balance the marginal utility of the commodity and that of money. But what we are really balancing is the marginal utility of that particular commodity and the marginal-utility of a host of other commodities which could he purchased with that amount of money

“Law of Equi-Marginal Utility” or "Law of Maximum Satisfaction'"

We all know that our wants are competitive. We have, therefore, constantly to make a choice between the more urgent and the less urgent wants. When we are weighing in our mind whether to buy a little more or a little less of a commodity, it seems that we are trying to balance the marginal utility of the commodity and that of money. But what we are really balancing is the marginal utility of that particular commodity and the marginal-utility of a host of other commodities which could he purchased with that amount of money. Money thus builds a bridge for us to pass from one commodity to another. This is bow substitution takes place. It is not merely a substitution of one thing for another satisfying the same want, e.g., substitution of tea for coffee, but substitution even of entirely different commodities.

Every practical person wants to make the best of his or her possessions. This is necessary because resources are scarce in relation to wants—a fundamental proposition with which we started the study of Economics. Every customer aims at getting the utmost possible contentment. For this purpose, he will substitute die more useful for the less useful thing. When he has done so, it will be found that marginal utilities in each bearing of his purchases have been poised.

Our hypothetical consumer is acting consciously or unconsciously on the principle which has been called by various names, the Law of Substitution, or the Law of Indifference, or the Law of Equi-Marginal Returns, the Law of Economy of Expenditure, the Law of Maximum Satisfaction. It is called the Law of Substitution, because we substitute one thing for another. It is known as the Law of Maximum Satisfaction, because through its application we are able to maximize our satisfaction. It is called the Law of Equi-Marginal Utility because it is only when marginal utilities have been equalized, through the process of substitution, that we get maximum satisfaction.

It happens like this. We assume that our consumer has a given income to spend, that his tastes are also given; that he wants to maximize his satisfaction and that the marginal utility of money to the consumer also remains constant during successive purchases. Further, we assume that commodities of his purchase arc subject-to the law of diminishing marginal utility so that after the consumer has spent some of his money on a particular commodity, the marginal utility to him of the commodity begins to fall. Then, he feels that he would gain greater satisfaction by spending additional units of money on something else. He goes on substituting one thing for another (after a point), until the whole of the money he wanted to spend is exhausted. When this is done, he has obtained equi-marginal utility. He cannot, now, increase his total utility by spending more on one thing and less on the other. If he could do so he would have done it already. Any rearrangement will mean a greater loss than gain in utility, the best arrangement being the one which equated his marginal utility under each head of expenditure.

Consumers Equilibrium- In the case of one commodity, a consumer is said to be in equilibrium when the marginal utility and price have been equated so that the consumer stops further purchase. In the case of more than one commodity, when expenditure of a consumer has been so adjusted, that is, when marginal utility in each direction of his purchases is the same, it is called consumer's equilibrium. Then he has no desire to buy any more of one commodity and less of another. Given a set of market prices, his wants and his income, the consumer may be said to be in equilibrium when marginal utilities have been equalized and maximum satisfaction obtained. Adjustment of wants to one another and to his environments is a sign of consumer's equilibrium.

In order to derive maximum satisfaction from the amount of money that a consumer has, he will so apportion his expenditure that the marginal utility of the goods purchased will be in proportion to their prices.

 

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Comments (1)

interesting and well written job......voted up

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