Introduction:

The law of EMU is another law of consumption and an extension of law of diminishing marginal utility. The law is called as Gossens second law consumption. The original explanation of the law has been given by an economist H.H. Gossen during 19^th century. The explanation of the law of equi-marginal utility is the behavior of a consumer in distributing his scarce resources among various goods and services.

Explanation of law:

A consumer has unlimited wants. His resources are strictly limited and they can put to alternate uses. Hence, he should spend his money in such a way as to get maximum satisfaction. The law of EMU states that,’ other things being equal, a consumer gets maximum satisfaction when he allocates his limited income to the purchase of different goods in such a way that the marginal utility derived from the last unit of money spent on each item of expenditure tend to be equal.’

The law of equi- marginal utility is based on the proportionate rule. It explains that a consumer will allocates his money income on the various purchases so as to get maximum satisfaction. For this purpose, he will compare marginal utility of different goods and marginal utility of commodities to its prices. If he finds that the marginal utility of commodity A is higher than that of commodity B, in that case, he will substitute A for B till marginal utilities of both the commodity are equalized.

The proportionate rule of the law can be explained with the help of the following table.

Assumptions

1. Income of the consumer is Rs. 20.
2. He wants to spend the entire Rs. 20 on both the commodities A and B.
3. Price of A and B per unit is Rs. 4 each.

Computation of the Ratios of marginal utility to prices

First Allocation of Income

To start with, let us assume that the consumer will spend Rs. 8.00 on commodity A and B Rs. 12 on commodity B. This helps him to buy 2 units of A and 3 units of B. The new combination of [ 2A +3B]. He will derive a total amount of 140 units of satisfaction. i.e.

2 units of A 35=30= 65

3 units of B 30=25=20=75  =140 MU

Re- Allocation of Income

In order to derive more than 140 units of satisfaction he will allocate his income so as to buy 3 units of A and 2 units of B. Thus he will substitute one unit of B for one unit of A. This new combination of 3A=2B proves to be his most ideal combination of 2 goods which helps to get the highest total satisfaction of 145 units.

3 units of A gives him- 35+30+25=90   

2 units of B gives him- 30+25=55  =145 MU

By adding the two he gets 145 total units of utility which is much more than the earlier combination. As per proportionality rule the consumer would get maximum satisfaction.

Conclusion

The Law of Equi -Marginal Utility is an economic principle that states that a rational consumer allocates income among different goods and services in such a way that the marginal utility per dollar (or per unit of currency) is equal for each good. In other words, the consumer seeks to maximize overall satisfaction by distributing their limited resources in a way that the additional satisfaction obtained from the last dollar spent on each good is the same.

also read: write a note on consumer surplus.