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8.2 Equilibrium of a consumer

(A) Law of Marginal Utility: The law of marginal utility was stated and developed by Menger, Marshall and others. It is the first and simplest attempt to analyze consumer behavior and to determine equilibrium: the most satisfying condition for a consumer where he can maximize his utility considering the limitations of price and income. The law suggests that the utility that a person gains from several units of the same good goes on falling because utility is subjective. The law is based on the satiability characteristic of wants. This is called the Diminishing Marginal Utility (DMU) principle. Marshall has stated the DMU as follows:

1) As the stock of commodity that a person already possesses,

2) increases,

3) the additional benefit that a person receives,

4) will increase but not as fast as the stock itself.

The four important parts of the principle of DMU as stated above have been presented in four separate lines. The implication of the DMU principle will be clear with the help of a numerical example. The example helps to bring out the basic principle underlying the law.

Four columns need to be drawn which should include the following information:

I. Total stock or number of units offered to and consumed by a person,

II. Every unit brings some utility which is progressively added to make up for Total utility,

III. Marginal or additional utility as the difference between Total utility of two succeeding units; such as 35 - 20 = 15, 44 - 35 = 9 etc. [Refer to the table below.]

IV. Finally in the last column, an evaluation of marginal utility in money units assuming that one unit of utility equals two cents.

I

II

III

IV

Stock or Units

Total Utility

Marginal Utility

Money value u =2c

1

20

20

40

2

35

15

30

3

44

9

8

4

48

4

8

5

49

1

2

The columns in the table correspond with the four lines of the statement of the law. The first column shows progressive increase in the stock or units of the good as 1, 2, 3...etc. The second column shows how the total utility or satisfaction that a consumer derives behaves with every increase in the stock. The total utility has been continuously or absolutely increasing as 20, 35, 44…etc. The third column shows the difference in the utilities of two successive units. This is the additional benefit or marginal utility. One would notice that marginal utility falls progressively (20, 15, 9...etc.) as the stock increases. This is the diminishing marginal utility tendency. It is also known as a relative fall in utility. This kind of a reduction is due to the progressive satisfaction of wants. As the utility of the good increases, the succeeding units are less intensely and less urgently needed by the consumer. Finally, in the fourth column marginal utility has been converted in money units with the conversion rule 1u = 2c.

Index

8.1 Theory Of The Consumer
8.2 Equilibrium Of a Consumer

Chapter 9

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