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Current Category » Introduction to Agriculture Economics

Utility Analysis - Law of Equimarginal Utility (EMU)

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:

  1. Ignorance: If a consumer is ignorant and blindly follows custom, he will may not make wrong use of money.

  2. Inefficient organizer: The inefficient business organizer will final to achieve the best result from the land, labour and capital. That he employs.

  3. Unlimited resources: When the resources are sample this law will be meaning less.

  4. Hold of custom and fashion: It the purchase is strongly influence by customer and fashion he will not obtain maximum satisfaction.

  5. Frequent changes in prices of different goods and services are occurred the observance of this law is difficult.

Practical Importance of Law of EMU:

  1. Consumption: A wise consumer acts on this law while arranging his expenditure and obtains maximum satisfaction.

  2. Production: To obtain maximum net profit, he must substitute one factor of producing to another so as to have most economical combination.

  3. Exchange: Exchange implies substitution of one thing to another and hence this law is important.

  4. Distribution: It is on the principle of the marginal productivity that the share of each factor of production is determined.

  5. 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.

 

Current Category » Introduction to Agriculture Economics