Question

Explain the law of equal marginal utility law substitution

Answer 1

Law of substitution is an important law in economics. ... Thus this law state that a consumer is in maximum satisfaction when the utility obtained from the last rupee spent on each commodity is same. Therefore this law is also known as the law of equi-marginal utility and law of maximum satisfaction.

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Answer 2

Law of substitution or Equi-marginal utility


source:www.vizireps.com
Law of substitution is an important law in economics. It is equally applicable in all parts of economics. This law was propounded by HH Gossen in 1854 AD. Therefore it is also called as Gossen’s second law. However scientific and analytical explanation of this law was made by Prof. Dr. Alfred Marshall.

According to Marshall "If a person has a thing, which he can put to several uses, he will distribute it among these uses in such a way that it has the same marginal utility in all."

Thus this law state that a consumer is in maximum satisfaction when the utility obtained from the last rupee spent on each commodity is same. Therefore this law is also known as the law of equi-marginal utility and law of maximum satisfaction.

Mathematically, a consumer is at maximum satisfaction when:

MUxPxMUxPx = MUyPyMUyPy = MUm

Where,

Mux = Marginal Utility of X goods

Px = Price of X goods

MUy = Marginal Utility of Y goods

Py = Price of Y goods

MUm = Marginal Utility of money

So, in order to maximize utility, an individual consumer compares the marginal utilities obtained from the different commodities. If the marginal utility obtained from the different commodities is not equal, the consumer goes on substituting one commodity with higher marginal utility for the commodity with lower marginal utility till the marginal utility obtained from the both commodities are equal. Therefore, this law is called a law of substitution.
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