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The Law of Diminishing Marginal Utility and Equi-Marginal Utility (Demand Analysis)

Updated on March 6, 2016
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IRSHAD CV has been a student in Economics. Now he is doing Masters in Economics. He completed B.A. Economics from the University of Calicut.

We can buy commodities by giving money, instead we will get its utility
We can buy commodities by giving money, instead we will get its utility | Source

Introduction

Utility analysis is one of the most discussing areas of Economics. This consists of how the law of demand is working. The determination of demand is based on the utility of a particular consumer is an oldest concept. All the human beings around the globe are demanding many things in one way or in another way. In economics, this behavior of human beings can be regarded as the demand and those who demanding commodities are consumers.

Simply, utility refers to the satisfaction enjoyed by a consumer from consuming commodities. There are different concepts related to utility. The two most important concepts are total utility and marginal utility. Total utility refers to the utility received by the consumer from consuming various goods and services. It will be the sum of utilities derived from each commodity. On the other side, marginal utility refers to those level of utility which the consumer received by consuming one more additional units of the same commodity. Anyhow, there are two important laws in economics which explains consumers’ utility or behavior. They are,

i) The law of marginal utility

ii) The law of equi-marginal utility

Each of these is explained below. Before that, there are some basic assumptions of utility analysis. They are mentioned below.

a) Cardinal approach

According to cardinal approach, utility can be measured in terms of numbers such as 1, 2, 3… Further the utility of different commodities will be different. Therefore, the utility of different commodities can be comparable.

b) Independent utilities for each commodity

The utility of each commodity will not be the same. It will be different. So, to derive the total utility, we must utilities received by the consumer from each commodity.

c) Introspection

It is natural that people are different and so their behavior too. But, here it is assumed that, there is no behavioral variation from the utility of a commodity among different consumers. The utility for a particular commodity will be the same for every consumer.

d) Marginal Utility of money is constant

Another important assumption is that, there is no either increasing or decreasing tendency in marginal utility of money. Whatever the quantity of money which the consumer holds, the marginal utility of money will be constant.

The Law of Diminishing Marginal Utility

The law of diminishing marginal utility says that, utility of a consumer will increase when he consumes a commodity again and again. But after a particular level, utility will decline. This is because of the working of diminishing marginal utility. That means, the increasing of total utility will be at a decreasing rate. It can be simply understand by the help of the following table.

Apple Consumed
Total Utility
Marginal Utility
1
20
20
2
32
12
3
38
6
4
38
0
5
35
-3
6
28
-7
The availability of varieties of commodities makes the consumer to purchase them rationally. So the utility analysis is very important
The availability of varieties of commodities makes the consumer to purchase them rationally. So the utility analysis is very important | Source

Based on the above table, a consumer or a hungry man is eating apples. When he consumes one apple, the utility will be equal to 20. When he consumes one more apple, total utility will increase, but less than the first utility. That is total utility is equal to 32 and marginal utility is equal to 12. Similarly when the person consumes apples again and again, his total utility will increase at a decreasing marginal utility rate. Once the consumer gets maximum utility (4 apples), his marginal utility will be equal to zero. When the person forced to eat again, his utility becomes dis-utility. That is negative marginal utility. This is the law of diminishing marginal utility.

The Law of Equi-Marginal Utility

The law of equi-marginal utility analysis is another concept, which explains how a consumer allocates his money resources on various commodities. The theory states that, every consumer will spend their money income on various commodities, when the marginal utility from each commodities are equals with the prices of them.

The demand of consumers for different commodities may not unique since there are commodities like necessary commodities, inferior commodities, luxurious commodities etc. Therefore, utility from each type of commodity will not be the same. Then a consumer will spend his income on different commodities which will give him higher marginal utility and that must be proportional to the price of commodities. Further, marginal utility from each commodity must be equal. This is the equi-marginal utility law.

For the purpose of better understanding, see the following table.

Quantity
Marginal Utility of Apple
Marginal Utility of Mango
1
80
90
2
65
70
3
55
54
4
48
40
5
41
29
6
38
26

Based on the above table, quantity column indicates various amounts of commodities which the consumer consumes. MUx and MUy are the marginal utilities of Apple and Mango respectively. Here the price of apple is 8 and mango is 9. Then the consumer will be in equilibrium, when he buys 4 units of apple and 3 units of mango since, marginal utility of each commodity is equally proportionate to its price. This means higher level of satisfaction.

That is MUx/ Px = MUy/ Py = MUe

= 48/8 = 54/9 = 6

In short, the law of equi-marginal utility says that, consumer will be in equilibrium when the marginal utility from each commodity equals and proportionate to its price.

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      IRSHAD CV 2 years ago from India, Kerala

      I agreed with you Mr.lawrence01 . Economics is dealing with the human behavior. that may be why it create difficulties to explain the human actions in words. But, the explanation becomes easier when we search out our real life matters....

      Any how thanks for reading and sharing you views

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      Lawrence Hebb 2 years ago from Hamilton, New Zealand

      I found this interesting but it was hard to understand at first until I got to the example of the apples. That made sense. Very interesting hub