Laws of utility: Definition, Types, Examples

Total satisfaction received from a good is the utility. The law of utility shows us how the utility is increased and decreased. There are two laws of utility analysis.

1. Law of diminishing marginal utility.
2. Equi-marginal principle

1. Law of diminishing marginal utility: 

The law of diminishing marginal utility is the law of economics which states that the more you consume a good the less satisfied you will be with each of the successive consumption. The law of diminishing marginal utility is an important concept in determining consumer preferences. For example: X felt hungry and he bought a pizza. He started eating each slice. When he ate the first slice he thought it was very good. So, he was very satisfied. When he ate the second slice, he felt good but not as good as at the time of eating the first slice. So, the utility diminished. 

Assumptions:

1. Tastes and preferences of consumers must remain same during the consumption period.
2. Marginal Utility of money(MU of money is the amount of satisfaction gained from an increase amount of money) remains constant.
3. Utility of one commodity is independent from other.
4. Every unit of the given commodity is of same size and quality.
5. There is no change in taste of consumers.

Limitations:

1. Not applicable to divisible goods like TV, AC, Fridge etc.
2. A bit of unrealistic in terms of constant MU of money, homogeneity.
3. Not applicable to hobbies.
4. When people compete with others about buying products, this law is inapplicable because people's utility also depend on the product of other people.

2. Law of equi-marginal principle:

The law of equi-marginal principle states that the consumer will choose a combination of goods to maximize their total utility. This will occur when,

Marginal utility of A/Price of a = Marginal utility of B/Price of B.

Assumptions of equi-marginal principle: 

• The income of consumer is fixed.
• The price of goods are fixed.
• The consumer wants to maximize their satisfaction.
• The consumer knows about the product well. 

Explanation:

Guess we have $6. Which we can say, 6 unit dollars ($1+$1+$1+$1+$1+$1). We can purchase apple and orange.

The marginal utility of apple is 8,7,6,5,4,3. The marginal utility of orange is 10,9,8,7,6,5.

According to the rule MU of a/price of a = MU of b/price of b. 

So, the equi-marginal utility will be any of 8=8,7=7,6=6,5=5.

Now the question appears which one will be the answer.

We find 8 in the position of 1 and 3 but the number of the fruits will be 6. So, this is not the answer

We find 7 in the position of 2 and 4 which is equal to 6. So, the perfect combination will be 2 apple and 4 orange. Any other allocation will give less utility to the consumer.

Limitation:

1. The biggest limitation of this law is there is no measurement of utility. So, we have to guess it and it varies from person to person.
2. This law is not effective when the market price is very volatile. 

End