THE LAW OF -EQUIMARGINAL UTILITY
It is also called as the law of substitution, or the law of indifference, or the law of maximum satisfaction. It is called the law of subs titution because when we substitute the more useful one. It is known as the law of maximum satisfaction, because through its application we are able to maximize our satisfaction. According to the law of equi- marginal utility, it is only when marginal utilities have been equalized, through the process of substitution. That one gets maximum satisfaction.
Assumptions of law of equi- marginal utility
i. The utility analysis is bases on the cardinal concept which assumes that utility is measurable and additive like weights and length of goods.
ii. Utility is measurable in terms of money.
iii. The marginal utility of money is assumed to be constant.
iv. The consumer is rational who measures, calculates, chooses and compares the utilities of different units of the various commodities and aims at the maximization of utility.
v. He has full knowledge of the availability of commodities and their technical qualities.
vi. He possesses perfect knowledge o f the choices of commodities open to him and his choices are certain.
vii.He knows the exact prices of various commodities and their utilities are not influenced b y
variations in their prices.
viii.There are no substitutes.
This is explained with the help of a diagram.
X axis -Quantity demanded
Y axis -Income
Ua-Total Utility of a
Ub-Total Utility of b