Laws of Utility Analysis

Laws of Utility Analysis:

    1) Law of Diminishing Marginal Utility

    2) Law of Equi-Marginal Utility

Law of Diminishing Marginal Utility

According to Marshall, “The additional benefits which a person derives from a given stock of a thing diminishes with every increase in the stock that he already has”.

It states that other things being equal, the marginal utility of a good diminishes as more of it is consumed in a given time period.

Assumptions

1) Utility can be measured in the cardinal number system.

2) Marginal utility of money remains constant. (value of money)

3) Utility of one commodity being used is of same quality and size.

4) There is a continuous consumption of the commodity.

5) Others things being equal. (Income, price of commodity & its substitute,

tastes, fashion, habits of the consumer).

Exceptions to the law

1) Curious and rare things.

2) Misers

3) Good book or poem (up to certain limit)

4) Drunkards

5) Consumptions of unequal units of the same commodity.

Causes of its Applications:

1) Commodities are imperfect substitutes

2) Satiability of particular wants (there is hardly any want which cannot be fully

satisfied)

3) Alternative uses. (Consumption of milk in a family)

Importance:

1) Basis of laws of consumptions

•  Law of equi-marginal utility
•  Law of demand
•  Concept of consumer’s surplus

2) Variety in production and consumption

3) Price Determination (reduced price per unit of the commodity)

Law of Equi-Marginal Utility

It states that in order to get maximum satisfaction, a consumer should spend his

limited income on different commodities in such a way that the last rupee spent on

each commodity yields him equal marginal utility.

According to Dr. Marshall, “If a person has a thing which he can 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) Cardinal measurement of utility is possible.

2) Consumer is rational, that is, he wants maximum satisfaction from his

income.

3) Income remains constant.

4) Marginal utility of money remains constant

5) Prices of commodities remains constant.

6) Commodity is divisible into small units.

7) Consumption takes place at a given time period.