Law of equi-marginal utility
Also called: Law of equi-marginal returns, Law of substitution, Gossen's second law · Topic: Consumer Behaviour, Demand and Elasticity · NCERT: Beyond NCERT
Meaning
The law of equi-marginal utility is also called Gossen's second law. It says a consumer gets the most satisfaction when the marginal utility per rupee is the same for every good she buys. Marginal utility (MU) is the extra satisfaction from one more unit of a good. MUx/Px = MUy/Py = MU of money Suppose MUx/Px is greater than MUy/Py. Then she moves a rupee from good y to good x, and keeps doing so until the two ratios are equal. This is the cardinal version of the ordinal equilibrium condition MRS = p₁/p₂.
Example
Tea costs ₹10 and its MU is 50, so she gets 5 units of utility per rupee. A samosa costs ₹20 and its MU is 60, so she gets 3 units per rupee. She should buy more tea and fewer samosas. As she buys more tea, its MU falls, and she stops shifting money when the MU per rupee is the same for both.
Don't confuse with
- Law of diminishing marginal utility (Gossen's first law): this is about one good, where MU falls as you consume more. The equi-marginal law is about splitting income across goods.
Related concepts
- Cardinal utility analysis
- Total utility
- Marginal utility
- Law of diminishing marginal utility
- Consumer surplus
- Diamond-water paradox