Consumers

P,is the price

e of X. The laW of
equimarginal utility can therefore be stated thus: the consumer
his money income dijferent goods in such a way that
on

ill spen
wilh i s
rtional to its price. That is, consumer is in equilibrium in marginal
p r o p o r t i o n a
utility of each
respect of the purchases
oftwogoods. X and Y when
MU,

Sand MUy are not equal and MU is greater than MU .hen the consumer
Now, if P P
substitute good X ffor good Y. As a result of this substitution, the marginal utility of good
rginal util
and marginal utility of good Y will rise. The consumer will continue substituting
will fall
X MU, MU,
good Xfor
good Y till becomes equal to
P When becomes equal to thethe
will be in equilibrium.
consumer
MU,
But the equality of with can be achieved not only at one level but at different
P Py
The question is how far does a consumer go in purchasing the goods he
The
evels of expenditure.
tThis is determined by the size of his money expenditure. With a given money expenditure
utility
wants.

good, the
consumer will derive some from it. Now, the consumer will go
on pur
on a becomes equal. Thus
on each good
hasino goods till the marginal utility of money expenditure holds good:
will be in equilibrium when the following equation
the consumer
MU MU MUm
P which the consumer is spending his income, the
If there are more than two goods on

must hold good for all of them.

above equation the aid of Tables 4.2 and 4.3 given
the law of equimarginal utility with
an
Let us illustrate

below:
Tabel 4.3. Marginal Utility of
Table 4.2. Marginal Utilities of
Money Expenditure
Goods X and Y
Units MU MUy
Unitss MUr MUy Px Py
(Uils) (Urils)
10 8
20 24 9
18 21 8
16 18 7
4
14 15
12 12
10 9
and and the
consumer

Rs. 3 respectively
the prices of goods X and
Y be Rs. 2 and in order to
maximise his utility
Let that
It is worth noting of the two goods
are
4 to spend on the two goods. because prices
ththe
Consumer will not equate marginal utility
of the goods marginal uulity
of money ex-
the last rupee (i.e.,
L i e will equate the
marginal utility of MU i t h MU, while
while spending
spending
words, he will equate
with P
u r e ) spent on these two goods. In other 4.2 by dividing
reconstructing
the above Table
Table
income on the two goods. Therefore,
utilities of Y (MU,, by Rs. 3 we get
maroi Oney Rs. 2 and marginal
by
lities of X (MU) expenditure.
4.3 which show marginal utility of money
 Business
100
Economic
By looking at the Table 4.2 it will become clear that
MUx
Px S equal to 5 utils wh
hen Ah
consumer purchases 6 units of good X and is equal to 5 utils when he buys 4
Py units of
good Y. Therefore, the consumer will be in equilibrium when he is buying 6 units of
4) Rs. 24 on the g0od
will be spending (Rs. 2 x 6 + Rs. 3x them. Thus,
=

and 4 units of good Y and

in the equilibrium position where he maximizes his utility:

MU,
P
MU-MU
=
MUm
Py
5
Thus 5 is the marginal utility of the last rupee spent on each ot the two goods he purchaos.
is the same, that is, Rs. 5. Be
Consumers equilibrium is graphically portrayed in Fig. 4.3. Since marginal utility curve
curves
ofthe goods slope downward, curves depictingg MU, and MU, also slope downward. Thus whe
P
the consumer is buying OH of X and OK of Y, then

MU MU = MU
Px Py
Therefore, the consumer is in equilibrium when he is buying 6 units of X and 4 units of
Y. No other aliocating of
money expenditure will yield greater utility than when he is buyine
6 units of X and 4 units of
commodity Y. Suppose if the consumer buys one unit less of good
X and unit more of good Y. This will lead to the decrease in his total
one
observed from Fig. 4.3 (a) that the
utiity. It will be
of
consumption 5 units instead of 6 units of commodity X
means a loss in satisfaction
equal to the shaded area ABCH and consumption of 5 units of
commodity Y instead of 4 units will mean gain in utility by the shaded area KEFL. It will be
Y
MU, Y
P M
10
Py
9|
8

Loss
6
Gain
MU
P, MU,
P
AH X 0 X
2 3 4 6
2 3 4 5
Quantity of X
Quantity of Y
(a)
(b)
Fig. 4.3. Equimarginal Principle and Consumer's Equilibrium
noticed that with this
rearrangement of purchases of the two goods, the loss in utility
exceeds gain inutility KEFL. Therefore, his total satisfaction will fall as a result of thisABC
rangement of purchases. Thus when the consumer is making purchases rea
by spending his give
Consumer's Beha
haviour: Cardinal Utility Theory 101

in such a way
that
P
MU MU, e will not like to make any further changes in the
h
ncome y
and will therefore be in equilibri situation by maximizing his utility.
of goods
sket he above equimarginal conditio for the cquilibrium of the consumer can be stated in
the following ways:
A consumer is in equilibrium when he cqualises the ratios of marginal utilities of goods

words, he is in equilibrium when MU,

with cach other. In other
and theirprices
P
P
MUn- MU
Pr is in equilibrium when he
rearranging the above equation we find that
a consumer
(in By
the ratio of marginal
utilities of goods with the ratio of corresponding prices for each
olises
MU Px and MU,
and forth.
MU, Py MU and
M and
that is, when so
consumed,
pair of goods
MU MU, worth of each good
() Since or measures the marginal utility of a rupee's
y
consumer can be said to be in equilibrium when the marg1nal
consumed at the given price,
on each good purchased is equal. Marginal utility of the last rupee
tility of the last rupee spent is
the marginal utility of a rupee's worth of the good. Thus, consumer
snent on a good means
income on various commodities in such a way that utility
equilibrium when he spends his given last rupee
each good is the same. If the marginal utility of the
from the iast rupee spent on consumer's equilibrium
on each good is
denoted by MUm, then equilibrium condition of
SDent
stated as under:
can also be

MU, MU, MU, MU,.

P PyP =MU,
Limitations of the Law of Equimarginal Utility
Like other laws of economics, law of equimarignal
utility is also subject to various limi-
the
of economics, brings out an important tendency among
tations. This law, like other laws law in the allocation of their
that all people exactly follow this
people. This is not necessary obtain maximum satisfaction. This is due
to the fol-
money income and therefore all may not
lowing reasons: in
in the real life, c o n s u m e r must weigh
1. For applying this law of equimarginal utility calculate and compare
commodities. For this he has to
his mind the marginal utilities of different that the
commodities. But it has been pointed out
the marginal utilities obtained from different
Consumers are generally governed by
are not so rational and calculating. amounts of
ordinary consumers
their habits and customs they purchase particular
habits and customs. Because of satisfaction
allocation maximizes their
difterent commodities, regardless of
whether the particular
or not.
of last rupee spent
applying this law in actual life and equate the marginal utility
2. For
the marginal utilities of dif-
must be able to m e a s u r e
commodities, the c o n s u m e r s It has been said
erent
terms. However, this is easier said than done.
commodities in cardinal
erent Being a state of feeling
the utility cardinally.
the c o n s u m e r to m e a s u r e
at t1s not possible for units with which to measure utility,
it is cardinally immeas-
Aaiso there being no objective in cardinal terms that
consumer's behaviour
is because the immeasurability of utility Allen. Ordinal
aIe.It ordinal utility by J.R. Hicks and R.G.D.
of
s been explained with theusehelp
of indifference curves
which we shall explain in
the next chapter.
involves the
L analysis equimarginal utility
is found in case of indivisibility
. Another limitation of the law of
 this ransfer
of
As a
result
o
98
i n c r e a s e .

the
f the poor person rises
will income of
c o m m u n i t y

the
the and
welfare of HH
that the falls by
the rich
man
4.2 that
n c o m e of in Fig.
seen
it will be ricn
LL). Now, of the
or
satisfaction
utility income
A
the loss of in his
result of decline HDCH,
Fur-
as a
man the area

is equal to in satis
Dy HH that the gain
will be seen
of an
ther, it the
increase
or by
utility the of
Taction
amount of income LlL
cquivalent

equal to LABL'.
poor man, is Gain
from the figure tha
It is thus obvious Is
in utility of the poor person
the gain
of the rich
than the loss of utility LossM
greater
or satistac-
man. Therefore,
the total utlity
will
taken together LL HH
tion of the two persons income
of some
transfer Money Income
increase through
on the basis
from the rich to the poor. Thus,
Fig. 4.2. Redistribution of Income
of money to Increne
of the diminishing marginal utility crease
and political scientists Social Welfare
many economists
must re
have advocated that Govemment welfare of the society. However, it.may
income in order to raise the economic
distribute redistribution of income t
that some economists challenge
the validity of such promoe
pointed out
of marginal utilhty 1s based upon i
the social welfare. They point out that the
above analysis
inadmissible and unscientific. They argue that te
personal comparison of utility which is quite
difer greatly in their preferences and capacity to enjoy goods and, therefore, it is difficult to
the exact shapes of the marginal utility curves of the different persons. Therefore they assertt
the losses and gains of utility of the poor and the rich cannot be measured and compared
PRINCIPLE OF EQUIMARGINAL UTILITY:
CONSUMER'S EQUILIBRIUM
Principle of equimarginal utility occupies an important place in marginal utility analysis. I'i
through this principle that consumer's equilibrium is explained. It is also called law of substiuain
because in it for reaching equilibrium position consumer substitutes one good for another. A consund
has a given income which he has to spend on various
goods he wants. Now, the question iS ow
he would allocate his money income
among various goods, that is to say, what would
equilibrium position in respect of the purchases of the various goods. It may be mentioned
that consumer is assumed to be "rational", that
is, he coldly and carefully calculates and sudslu
goods for one another So as to maximise his utility or satisfaction.
Suppose there are only two goods X and Y on
which
income. The consumer's behaviour will be has to spend d given
a consumer
governed by two factors: Firstly, the marginal utilites
goods. Suppose the prices of the goods ur
of the goods and secondly, the prices of two
given
for the consumer. The law of atis
equimarginal utility states that the
money income between the goOds in such a consumer will dsu
way that the utility rupee
spent on each good equal. In other words, consumer is
is derived from the la
in ion when narginal
utility of money expenditure on cach good is the
same.
equilibrium position noney
expenditure on a
good equal tne marginal
is to Now, the marginal utility
price of the
good. In symbols, utility of a good divided by the pr

MU MU
P.
where MUm is marginal utility of money
expenditure and MU, is the of .
and

margina
inal utility