The principle of equi -marginal utility occupies an important place in the utility analysis

.This law is an extension of the law of dimi-marginal utility. The idea of equi-marginal principle
was fiRs..t mentioned by H.H.Gossen (1810-1858) of Germany. Hence it is called Gossen's
second Law. Alfred MaRs..hall made significant refinements of this law in his "Principles of
Economics."

This law is also called the law of substitution or the law of maximum satisfaction. It is obvious
that the law of dimi-marginal utility is applicable only to single want with a commodity but in
reality there may be a number of wants to be satisfied at a time and this various wants are to be
satisfied with several goods. To analyse such a situation the law of equi-marginal utility is useful.
The law of equi-marginal utility is based on the three characteristics of wants, viz. that wants are
comparative, substitutable and complementary. The law takes following axioms as its starting
point:

i. The consumer has limited income or limited stock of a given commodity.

ii. The consumer has more than one want to satisfy.
iii. The consumer is rational and seeks maximum satisfaction.
iv. He has no control over the price of the commodity , but the prices are given.

Statement of Law
The law of equi-marginal utility states that other things being equal a consumer gets maximum
total utility from spending his given income when he allocates his expenditure to the purches of
different goods in such a way that the marginal utility derived from the last unit of money spent
on each item of expenditure tend to be equal.(That is to say the consumer maximize his
satisfaction when he obtains equi-marginal utility from all the goods purchased at a time.)
In other words we can say that a consumer should allocate his limited income in such a way that
the marginal utility of the different commodity which he purchases is the same.
According to Prof. MaRs..hall-The law of equi-marginal utility is on the base of proportionality
rule. The proportionality rule states that when the ratio of marginal utility to price of different
goods are equal. The consumer derives maximum total utility.
In symbolic term, the proportionality rule may be stated as under-
 MU a MU b MU c MU n
= = ==
Pa Pb Pc Pn
Mu = Marginal utility
p = price
abc = Refer to different commodity.

Illustration of the law:-

let us assume that :-
(i) A consumer has a given income of Rs... 24.
(ii) He wishes to spend his income on three different goods-a.b and c.
(iii) The price of a commodity is Rs...2 per unit ,b commodity is Rs...3 per unit and c commodity
is Rs... 5 per unit.

Marginal Utility Schedule

UNTIS OF COMMODITY MUa MUb MUc
1 30 24 15
2 20 15 10
3 16 9 8
4 8 6 5
5 6 3 1
6 4 1 0

Now, question is that how would consumer spend his Rs.. 24 so that he derives maximum
satisfaction . As per the proportionality rule of the law of equi-marginalutility . We may solve the
problem as under.
 Computation of the ratio of marginal utility to price
UNTIS OF COMMODITY MU a MU b MU c
Pa Pb Pc
1 30/2= 15 24/3= 8 15/5= 3
2 20/2= 10 15/3= 5 10/5= 2
3 16/2= 8 9/3= 3 8/5= 1.6
4 8/2= 4 6/3= 2 5/5= 1
5 6/2= 3 3/3= 1 1/5= 0.2
6 4/2= 2 1/3= 0.33 0/5= 0

As per the law, the consumer would get maximum total satisfaction when:

6 9 15
= = =3
2 3 5
In this case , the consumer will get the maximum satisfaction when he spends Rs. 10/- on a
commodity, Rs.. 9/- on b commodity, Rs..5/- on c commodity. By spending his income in this
way he gets 5,3and 1 unit of the commodities a, b & c respectively.
It follows that total utility so derived tends to be:
TUa = 30+20=16=8=6 = 80 TUb = 24+15+9 = 48 TUc= 15 = 15
TU 143
Therefore , TU=143 is the maximum aggregate satisfaction . Here consumer will be in
equilibrium.
The law of equi-marginal utility can also be expressed graphically as below:
MARGINAL UTILITY

UNITS OF GOOD A
UNITS OF GOOD B UNITS OF GOOD C
In figure money expenditure of a given income is denoted on the x-axis. The y-axis represents
utility. Curve MUa, MUb, MUc are the marginal utility curves for the three assumed
commodities a, b and c respectively. It can be seen that these curves are drawn in such a way that
they show the relative oder of preferences of the given goods a, b and c (i.e. the first unit of
commodity a gives more utility than that of b and so on.) In graphical terms, now the conusmer
will allocate his income in such a way that he will purchase OA Units of good a, OB units of
good b, OC units of good c. It is easy to see that by spending his income in this way , the
consumer equalises the marginal utilities of each commodity purchased. Thus, marginal utility
MA=NB=LC or OU for each commodity. Obviously, his total satisfaction in this is maximum.

Limitations of the Law

The law of equi-marginal utility bristles with the following difficulties.

1. Indivisibility of Goods: The theory is weakened by the fact that many commodities like a
car, a house etc. are indivisible. In the case of indivisible goods, the law is not applicable.

2. The Marginal Utility of Money is Not Constant : The theory is based on the assumption
that the marginal utility of money is constant. But that is not really so.

3. The Measurement of Utility is not Possible: Marshall states that the price a consumer is
willing to pay for a commodity is equal to its marginal utility. But modern economists argue that,
if two persons are paying an equal price for given commodity, it does not mean that both are
getting the same level of utility. Thus utility is a subjective concept, which cannot be measured,
in quantitative terms.

4. Utilities are Interdependent: This law assumes that commodities are independent and
therefore their marginal utilities are also independent. But in real life commodities are either
substitutes or complements. Their utilities are therefore interdependent.

5. Indefinite Budget Period : According to Prof. K.E. Boulding, indefinite budget period is
another difficulty in the law. Normally the budget period is assumed to be a year. But there are
certain commodities which are available in several succeeding accounting periods. It is difficult
to calculate marginal utility for such commodities.
 In conclusion, we may say all prudent and rational persons are expected to act upon the law
consciously or unconsciously. As Chapman puts it,"We are not, of course compelled to distribute
our incomes according to the law of substitution or equi-marginal expenditure, as a stone thrown
into the air is compelled, in a sense to fall back to the earth, but as a matter of fact, we do in a
certain rough fashion, because we are reasonable."

Importance of Law of Substitution

According to Marshall, "the applications of this principle extend over almost every field of
economic activity."

1. It applies to consumption :Every rational human being wants to get maximum satisfaction
with his limited means. The consumer arranges his expenditure in such a way that, M U a/Pa
= M U b/Pb = M Uc/ P c so that he will get maximum satisfaction.

2. It applies to production : The aim of the producer is to get maximum output with least-cost,
so that his profit will be maximum. Towards this end, he will substitute one factor for another till

MPl / Pl = MPc / Pc = MPn / Pn

3. Distribution of Earnings Between Savings and Consumption: According to Marshall, a

prudent person will endeavour to distribute his resources between his present needs and future
needs in such a way that the marginal utility of the last rupee put in savings is equal to the
marginal utility of the last rupee spent on consumption.

4. It applies to distribution: The general theory of distribution involves the principle of

substitution. In distribution, the rewards to the various factors of production, that is their relative
shares, are determined by the principle of equi-marginal utility.

5. It Applies to Public Finance: The principle of 'Maximum Social Advantage' as enunciated

by Professors Hicks and Dalton states that, the revenue should be distributed in such a way that
the last unit of expenditure on various programmes brings equal welfare, so that social welfare is
maximised.
6. Expenditure of Time: Prof. Boulding relates Marshall's law of equi-marginal utility to the
expenditures of limited time, i.e. twenty-four hours. He states that a person should spend his
limited time among alternative uses such as reading; studying and gardening, in such a way that
the marginal utility from all these uses are equal.

CONSUMER'S SURPLUS
The concept of surplus was developed by A.J. Dupuit in 1844 to measure social benefits of
public goods such as canals, national highways, bridges. Alfred Marshall further developed the
concept in his "Principles of Economics" published in 1890. His concept of consumer surplus
was based on the measurability and interpersonal comparision of utility. According to him every
increase in the consumer surplus is the good indicator of increase in social welfare. Prof.
Boulding calls it as "Buyers' surplus".

Consumer surplus is the difference between the total amount that consumers are willing and
able to pay for a good or service (indicated by the demand curve) and the total amount that they
actually do pay (i.e. the market price for the product).

For example, if a consumer is prepared to pay Rs. 50 for a commodity X but when he goes to the
market and finds that the commodity is available only for Rs. 40. If he buys the commodity he
gets a consumer surplus of Rs. 10. The amount of money which a person is willing to pay for a
good indicates the amount of utility he derives from that good, the greater the amount of money
he is willing to pay, the greater the utility he will obtain from it. Therefore, the marginal utility is
the determinant of the price of a commodity what a consumer is willing to pay. Thus,

Consumer surplus = Sum of Marginal Utilities - PriceNo. of Units Purchased

Consumer Surplus = Willingness to pay price - Actual Price Paid

Assumptionss of the Law of Consumer's Surplus

Expected Price should be more than actual price.

 MU must be greater or equal to the price of commodity.

Consumer is rational.

Constant marginal utility of money.

The concept of consumer's surplus can be illustrated with the help of schedule:

No. of Units of X MUx(willingness to pay) Price (Rs) Consumer Surplus

Rs. (Rs)

1 70 20 50

2 60 20 40

3 40 20 20

4 30 20 10

5 20 20 0

Total 220 100 120

We can see that from the first unit of commodity X, the consumer gets the consumer surplus of
Rs. 50 and thus goes on buying X till he receives marginal utility equal to its price. In this way ,
while buying 5 units the consumer gets total marginal utilities of Rs. 220 by spending Rs. 100
and thus gets Rs. 120 as consumer surplus. The marginal unit (i.e. 5th unit) does not give any
consumper surplus, therefore , consumer does not go beyond the 5th unit.

Consumer's Surplus = Sum of MU - PriceNo. of Units Purchased

= 220-520=120
It can also be graphically shown:

In the given figure Price and MU are shown on Y-

axis and Units of commodity purchsed is shown
on x-axis.. Price of the commodity is decided at
P and thus resultant quantity demanded is OQ.

If we see at the consumer demanding first unit of

the commodity, he is ready to pay the price OY
but he ends up paying OP as that is the price
decided for the commodity. The difference PY is
the benefit which this consumer saves and is termed as consumer surplus i.e. profit gained by the
consumer. To get the total consumer surplus for this commodity we can add up the benefit of all
the consumers, that is the shaded area PRY.

Criticism of Consumr's Surplus

The concept of consumer's surplus has been criticized on several grounds as follows:

1. Imaginary
The concept of consumer's surplus is a purely imaginary idea. We just imagine what we are
prepared to pay and subtract what we actually pay. It is all hypothetical.

2. Utility is not measurable

The concept of consumer's surplus is based on the assumption that utility can be measured
quantitatively in term of money. But utility is a subjective concept. Therefore, utility cannot be
measured quantitatively.

3. Marginal utility of money not constant

The concept of consumer's surplus supposes that the marginal utility of money remains constant
throughout the process of exchange. But the marginal utility of money does not remain constant.
When a consumer spends his given money income on the purchase of a commodity, the amount
of money left him is reduced and its marginal utility to him increases. While calculating
consumer's surplus, we do not take into consideration this change in the marginal utility of
money.

4. Not applicable to necessaries

The concept of consumer's surplus does not apply to necessaries of life or conventional
necessaries. The price of necessaries is very low whereas utility derived from them is very high.
Therefore, consumer's surplus from them is infinite when a man is dying of thirst, he may
be prepared to pay any amount of money for a glass of water.

5. Neglect complementary commodities

Marshall assumes that the utility of a commodity depends upon the supply of that
commodity alone. He neglect the problem of complementary of commodities. Thus, he considers
one commodity as independent of the others.

6. Neglect Substitutes
This concept assumes the absence of substitutes of the commodity from which the consumer
derives the surplus because the presence of substitutes like tea and coffee would make the
measurement of consumer's surplus difficult.

Importance of Consumer's Surplus

The concept of consumer's surplus has great practical importance, which are as follows:

1. Importance in public finance

Consumer's surplus is useful to a finance minister in imposing taxes and fixing their rates. He
will tax those commodities in which the consumers enjoying much surplus. In such cases, the
people would be willing to pay more than they actually pay. Such tax will bring more revenue to
the state.

2. Importance to businessman and monopolist

The concept of consumer's surplus is very useful to the businessman. He can raise price of those
commodities in which there is a large consumer's surplus. The seller will be able to raise price if
he is monopolist and control the supply of the commodity.
3. Comparing advantages of different places
The concept of consumer's surplus enables us to compare the advantages of environment and
opportunities. A person living in a developed area enjoys greater consumer's surplus than a
person living in a remote area because the former is able to get all the amenities of life cheaply
and easily. It also enables us ti compare standard of living of the people living in different parts
of the world. The larger the consumer's surplus the better off is the people.

4. Measuring benefits from international trade

We can measure the benefit from international trade with the idea of consumer's surplus.
Suppose that before entering into trade with another country we are prepared to pay $ 1000 for a
computer. But after establishing trade relation, we get it for $ 750. The difference between what
we were prepared to pay for the computer and what we actually pay is the consumer's surplus
which measures the benefit fro international trade.

5. Distinction between value in use and value in exchange

The concept of consumer's surplus helps us to distinguish between value in use and value in
exchange. Value in use means utility and value in exchange means the price of a commodity.
Commodities like salt, post card, match box etc. have a great value in use but a very small value
in exchange. Consumer's surplus from such commodities is very large because we are prepared
to pay much more for such commodities than we actually pay.