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Economic Theory

various commodities to get maximum satisfaction. The law of equi-
marginal utility is also known as the law of substitution or the law of
maximum satisfaction or the principle of proportionality between prices
and marginal utility.

In the words of Prof. Marshall, “If a person has a thing which can be
put to several uses, he will distribute it among these uses in such a way

that it has the same marginal utility in all”.
Assumptions of the Law:
1. The consumer is rational so he wants to get maximum satisfaction.
2. The utility of each commodity is measurable.

3. The marginal utility of money remains constant.
4. The income of the consumer is given.
5. The prices of the commodities are given.

6. The law is based on the law of diminishing marginal utility.
Explanation of the law. Suppose there are two goods X and Y on
which a consumer has to spend a given income. The consumer being
rational, he will try to spend his limited income on goods X and Y to

maximize his total utility or satisfaction. Only at that point the consumer
will be in equilibrium.
According to the law of equi-marginal utility, the consumer will be in

equilibrium at the point where the utility derived from the last rupee spent
on each is equal. Symbolically the consumer will be in equilibrium when

MU x  MU y  MU , (5.2)

P x P y m

where MUx – marginal utility of commodity X,
MUy – marginal utility of commodity Y,
Px – price of commodity X,

Py – price of commodity Y,
MUm – marginal utility of money.

4. Indifference Curve and Indifference Map
An indifference curve is the locus of different combinations of two
commodities giving the same level of satisfaction.

Assumptions of indifference curve analysis:
1. The consumer is rational. So, he prefers more goods to less goods.
2. He purchases two goods, X and Y only.

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