Economics

Assumptions And Limitations Of Law Of Equi Marginal Utility

In the below, Diagram (A) and Diagram (B) denote the marginal utility and total utilities derived from coffee and bananas respectively.  The amount spent on the two commodities are shown along OX axis and the total utility from the two commodities are shown along OY axis.  The consumer derives 6 utils of marginal utility by spending 1 Dollar on coffee and 6 utils of Marginal utility by spending  2 dollars on bananas. So the marginal Utilities remain equal in both the cases with this expenditure.

The law of equi marginal utility is based on some basic assumptions which are described below.

Assumptions And Limitations Of Law Of Equi Marginal Utility

Assumptions Of Law Of Equi Marginal Utility :

The Law Of Equi Marginal Utility is based on the following assumptions:

1) Marginal utility can be measured.

2) Achievement of maximum satisfaction is the main objective of a consumer.

3) The consumer has perfect knowledge of prices.

4) Consumer’s income is constant.

5) The margin ,of money remains unchanged.

6) It is possible to spend money in small amounts.

Limitations Of Law Of Equi Marginal Utility

The Law Of Equi Marginal Utility is criticized on several grounds. Its practical utility is undermined due to the following limitations :

1. All goods are not divisible:  This law is based on the assumption that all quantities of goods in respect of their utilities are fully divisible. But is is not completely correct. Even though the money and utilities divisible, it is not possible to divide all goods in small quantities. For instance we can’t secure half-a-car or half-a-Television in the market. In such cases, utilization of utilities is not possible.

2. Consumer’s perfect knowledge is a myth : The law of equi marginal utility considers at the consumers have a perfect knowledge of the alternative choices open o them. Since most of the consumers are either ignorant of the various alternatives for spending their money on different commodities, this assumption is a myth only.

3. Consumers’ choice – uncertain and risky : This law assumes that the choice of the consumer is certain. But in reality consumers choices are mostly uncertain and risky.

4. Heterogeneous goods : This law is based on the assumption that goods are homogeneous. But all goods are not homogeneous in several aspects.

5. Weighing utilities —an  impossibility : This law states that a consumer tries to equalize the marginal utilities of different commodities for achieving maximum satisfaction. But this is unrealistic. As against this, marginal utilities can’t be measured. Besides, the consumers do not weight utilities whenever they buy commodities and balance them.

 6. Constant utility of money -unrealistic assumption:  According to this law, marginal utility spent on different commodities is constant. But this is not correct. Consumers have less amount of money when they purchase more and more units of commodities. As a result marginal utility of money, instead of remaining constant, increases considerably.

7. Changes in Tastes, fashions etc:  This law assumes that Consumers’ tastes, fashions, preferences etc. remain unchanged. But this assumption is not real. Indeed, these factors change frequently due to the influence of several factors like changes in the size of population, social and economic conditions, standard of living etc.

8. Scarcity of goods : This law ignores the fact that goods and services are scarce in supply. It assumes that goods can be substituted by the individuals for getting maximum satisfaction. But as goods are scarce in supply, the demand for them determines their prices.

9. Free Goods : This law is not applicable in the case of free goods. Because these goods are abundant in supply when compared to their demand. As result no consumer compares the marginal utilities of these goods and selects them in a preferential manner.

10. Unrealistic one:  The law of equi marginal utility is based on the unrealistic assumption of the cardinal measurement of utility and constancy of marginal utility of money.

11. Exact calculation— not possible:  This law assumes that marginal productivity of factors of production can be calculated exactly. But such a calculation is not possible.

12. Difficulty in measuring the marginal utility of durable goods : This law supposes that the utility of all types of goods can be measured easily. But it is very difficult to compare the marginal utilities of durable goods of long run use and short-run-use.

13. Quantity Determinant of utility — not correct: The law of equi marginal utility assumes that utility of a commodity is determined by its quantity. But this is not real. In fact, utility is determined by several other factors like availability of substitutes, complementaries, level of income, tastes and fashions etc.

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