This
law of Equimarginal Utility is another fundamental principle of Economics. It
is also known as law of substitution or law of Maximum satisfaction. We have
already seen that human wants are unlimited whereas the means to satisfy these
wants are strictly limited. It therefore becomes necessary to pick up the most
urgent wants that can be satisfied with the money that a consumer has.
In
order to get maximum satisfaction out of the funds (money) we have, we
carefully weigh the satisfaction obtained from each rupee that we spend. If we
find that a rupee spend in one direction has greater utility than in another,
we shall go non spending money, on the former ( first) commodity, till the
satisfaction derived from the last rupee spent in the two cases is equal. In
other words, we substitute some units of commodity of greater utility for some
units of the commodity of less utility. The results of this substitution will
be the MU of the former will fall and that of the latter will rise, till the
two marginal utilities are equalized. That is why this law is called the laws
of substitution or equimarginal utility.
This
law has been illustrated with the help of table given below.
Units |
Marginal Utility of
oranges
|
Marginal Utility of
apples.
|
1
|
10
|
8
|
2
|
8
|
6
|
3
|
6
|
4
|
4
|
4
|
2
|
5
|
2
|
0
|
6
|
0
|
2
|
7
|
2
|
4
|
8
|
4
|
6
|
Suppose
apples and oranges are the commodities to be purchased suppose we have go seven
rupees to spend. Let us spend three rupees on oranges and four rupees on
apples. The utility of 3rd unit of oranges is 6 and that of the 4th unit of
apples is 2. As the MU of oranges is higher, we should buy more of oranges and
less of apples. Let us substitute one orange for one apple so that we buy four
oranges and three apples. Now the MU of both oranges and apples is the same
i.e. 4. This arrangement yields maximum satisfaction. Thus total utility of 4
oranges would be 10+8+6+4=23 and of three apples 8+6+4=18 which gives a total
utility of 46. The satisfaction given by 4 oranges and 3 apples of on one rupee
each is grater than could be obtained by any other the total utility fiends
less than 46. Thus, it can be concluded that we obtain maximum satisfaction
when we equalize marginal utilities by substituting some unit of the more
useful for the less useful commodity.
Limitation
of the Law of Equi- Marginal Utility:
- Ignorance: If a consumer is ignorant and blindly follows custom, he will may not make wrong use of money.
- Inefficient organizer: The inefficient business organizer will final to achieve the best result from the land, labour and capital. That he employs.
- Unlimited resources: When the resources are sample this law will be meaning less.
- Hold of custom and fashion: It the purchase is strongly influence by customer and fashion he will not obtain maximum satisfaction.
- Frequent changes in prices of different goods and services are occurred the observance of this law is difficult.
Practical
Importance of Law of EMU:
Consumption:
A wise consumer acts on this law while arranging his expenditure and obtains
maximum satisfaction.
Production:
To obtain maximum net profit, he must substitute one factor of producing to
another so as to have most economical combination.
Exchange:
Exchange implies substitution of one thing to another and hence this law is
important.
Distribution:
It is on the principle of the marginal productivity that the share of each
factor of production is determined.
Public
finance: The Govt. is also guided by this law in public expenditure. The
Govt. can expend its revenue (money) in such a way that it will secure maximum
welfare of the people.
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