Model Answer
0 min readIntroduction
Alfred Marshall’s Law of Equi-Marginal Utility, a cornerstone of neoclassical economics, explains how consumers allocate their limited income among various goods to maximize their total utility. It posits that a consumer will achieve maximum satisfaction when the marginal utility per rupee of expenditure is equal across all goods consumed. This principle, however, isn’t universally applicable and rests on several key assumptions, one of which is the nature of the marginal utility curves of the commodities considered. The assertion that validity hinges on unitary elasticity of these curves requires a detailed examination of the relationship between utility, price, and consumer behavior.
Understanding the Law of Equi-Marginal Utility
The Law of Equi-Marginal Utility states that a rational consumer allocates his/her income in such a way that the marginal utility derived from the last rupee of income spent on each good is equal. Mathematically, this can be represented as: MUx/Px = MUy/Py = MUn/Pn, where MU represents marginal utility, P represents price, and x, y, n represent different goods. This ensures that the consumer is getting the maximum possible satisfaction from their limited resources.
The Role of Unitary Elasticity
The assumption of unitary elasticity of the marginal utility curves is critical for the law’s validity. Unitary elasticity implies that a 1% change in the quantity consumed leads to a 1% change in marginal utility. This relationship is crucial because it ensures that as a consumer shifts expenditure from one good to another, the change in utility gained from the second good exactly compensates for the utility lost from the first.
Consider a consumer allocating income between two goods, X and Y. If the marginal utility curves have unitary elasticity, a small decrease in the consumption of X will lead to a proportionate decrease in its marginal utility. Simultaneously, a small increase in the consumption of Y will lead to a proportionate increase in its marginal utility. This proportionate change allows the consumer to reallocate resources until MUx/Px = MUy/Py, achieving equilibrium.
Mathematical Explanation
Let’s denote the marginal utility of good X as MUx and its price as Px. Similarly, for good Y, we have MUy and Py. The condition for equilibrium is MUx/Px = MUy/Py. If the marginal utility curves exhibit unitary elasticity, then the percentage change in MUx is equal to the percentage change in the quantity of X consumed. This ensures that the ratio MUx/Px remains constant as the consumer adjusts their consumption bundle.
Consequences of Non-Unitary Elasticity
If the marginal utility curves are not unit elastic, the law of equi-marginal utility may not hold.
- Elastic Marginal Utility (Elasticity > 1): If the marginal utility curves are elastic, a small decrease in consumption of one good leads to a more than proportionate decrease in marginal utility. This can lead to over-correction and instability in the consumer’s allocation.
- Inelastic Marginal Utility (Elasticity < 1): If the marginal utility curves are inelastic, a small decrease in consumption of one good leads to a less than proportionate decrease in marginal utility. This can lead to under-correction and prevent the consumer from reaching equilibrium.
For example, if the marginal utility of food is highly inelastic (necessity), reducing food consumption slightly won't significantly increase its marginal utility. The consumer might not shift resources effectively, leading to suboptimal utility.
Real-World Implications and Limitations
While theoretically sound, the law faces limitations in the real world. Consumer preferences are often complex and influenced by factors beyond price and marginal utility. Behavioral economics highlights the role of biases and heuristics in decision-making, which can deviate from the rational assumptions underlying the law. Furthermore, the assumption of perfect divisibility of goods is often unrealistic.
Conclusion
In conclusion, the validity of Marshall’s Law of Equi-Marginal Utility is fundamentally linked to the assumption of unitary elasticity of the marginal utility curves. This ensures proportionate adjustments in utility as consumers reallocate their resources, leading to equilibrium. Deviations from unitary elasticity can disrupt this balance and prevent consumers from maximizing their satisfaction. While the law provides a valuable framework for understanding consumer behavior, its limitations must be acknowledged in the context of real-world complexities.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.