9/12/2012

1

2nd Lecture

LAW OF EQUITY MARGINAL UTILITY

By

Muhammad Qasim0312-4834685

(Microeconomics)1st Half

1

LAW OF EQUITY MARGINAL UTILITY

• Introduction

• Law

• Table

• Explanation of Table

• Graph

• Explanation of Graph

• Assumptions

• Limitations2

9/12/2012

2

INTRODUCTION

• It is one of the important law of economics. This

law is related with Utility. “Utility is the power of

commodity that satisfy a human need”.

• It is also known as the Law of Substitution and the

Law of maximization of satisfaction.

3

LAW

• “Other things remain same, a consumer spend his

income in such a way that MU from last unit of

each commodity become equal”.

4

9/12/2012

3

Assumptions of the Law:-

These assumptions are –

• Utility can be measured.

• Utility from different commodity can be added.

• Utilities are independent.

• Marginal utility of money remains constant.

• Utility is cardinal.

• Consumer is rational.5

We assume that:

• The consumer has Rs.5 to spent.

• He has to spend his income on two goods A and B.

• The price of each good is Rs.1 per unit.

6

9/12/2012

4

THE FOLLOWING TABLE WILL MAKE THE LAW OF EQUITY MARGINAL

UTILITY MORE CLEAR.

Units of Money MU of A MU of BRs. 1 10 8

Rs. 2 8 6

Rs. 3 6 4

Rs. 4 4 2

Rs. 5 2 0

Total 30 207

FROM THE ABOVE TABLE, • There are three columns in the above table. First column

measures the Unit of Money, second MU of A and thirdcolumn measures MU of B.

• To get maximum satisfaction a consumer will spendRs. 3/- on A and Rs. 2/- on B. Because in this way the totalamount of utility will be maximum. When a consumer willspend Rs. 3/- on A he will get = 10 + 8 + 6 = 24 byspending two rupees on B he will get = 8 + 6 = 14 Totalamount of satisfaction will be 24 + 14 = 38.

• If he will adopt any other method, he would not get suchamount of utility. So we find that when the marginalutilities ( 6 = 6 ) are equal the total utility is maximum. Noother combination will give him more satisfaction exceptthis one. 8

9/12/2012

5

THE GRAPH WILL MAKE THE LAW OF EQUITY MARGINAL UTILITY MORE

CLEAR.

9

MUC of AMUC of B

Diagram

Marginal Utility

Y

M’

K

F H

K’

XJG

M

IN THE ABOVE FIGURE,

• In this diagram MM' is the marginal utility curve of A. If

consumer spends Rs. 3/- on A. The 3rd rupees utility is

FG, KK' the marginal utility curve of B. The last rupee

utility is HJ. Both the marginal utilities FG = HJ.

10

9/12/2012

6

1. Immeasurable Concept: The concept of utility is immeasurableso it is very difficult to behave according to the law.

2. Carelessness: Sometimes due to ignorance people do not obtainthe maximum advantage by equating the marginal utilities.

3. Indivisible Units: If the unit of expenditure is indivisible thenthis law will not operate.

4. Customs: People are slave of customs and traditions, so they usethe goods like gold even there is less utility.

5. Freedom of choice: If there is no perfect freedom to choosebetween various commodities, then the law will not operate.

11

LIMITATIONS OF THE LAW

?

End

12