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Friday, 7 September 2018

Law of equi marginal utility : Meaning and Limitations

Consumer strikes equilibrium in two commodities case when law of equi marginal utility holds good
Law of equity Marginal Utility


Law of Equi Marginal Utility

There are also a competition between wants. As we know that there are scarcity of resources in relation to multiple wants. So we have more urgent and less urgent wants. When we buy commodities, there is always a pre decided plan whether more or less of a particular commodity have to be purchased.

For example, if we have Rs 50 and want to purchase vegetables lady finger, Cauliflower and potato then we decide according to our want the quantity of each vegetable; which one is to buy more and which one is to buy less. This is the nature of a rational human being that he tries to balance the marginal utility of other commodities which he could purchase with that of money.

Law of equi marginal utility
Law of Equi Marginal Utility


A prudent person wants to make the best of his resources because resources are scarce. Every person wants to get maximum satisfaction so he substitutes more useful for less useful things. This behaviour of buyer makes equal marginal utilities for all things.

A consumer is acting consciously or unconsciously on the principle which has been called by various names i.e law of substitution, law of indifference, law of economy of expenditure.

“ Law of maximum satisfaction. Through its application a consumer is able to maximize his satisfaction. It is called the law of Equi Marginal Utility because it is only when marginal utilities have been equalised through the process of substitution that he gets maximum satisfaction.”

In other words , when last rupee spent by a consumer on two commodities gives equal marginal utilities, it is called law of equi marginal utility.

When consumer is spending his income on two goods say X and Y then consumer will strike his equilibrium when

MUx/Px = MUy/PY

Further , law of diminishing marginal utility has important place when consumer substitutes commodities. Let me explained you with an example

Suppose MUx = 8 and MUy = 10. Price of X and Y is 5 rs per unit. In this case MUx/Px = 8/5 and MUy/Py= 10/5 . Both are not equal. Consumer is getting more utility from Y. Consumer will continue to consume Y. A stage will appear when desire for Y will start to decrease. Consequently marginal utility of Y will start to decrease until both will become equal. This will happened same in case of X commodity.

Limitations

This law requires very careful calculations of the expected satisfaction and comparison with the money spent but how many of us are capable of such exact calculations. All humans are not so rational. Most of the expenditure is governed by habits. In habits there is not much exact calculation of the utilities.

When we are going to spend big amount, we think before spend. This is not in the case of small expenditures.

When people prefer customs and fashion, they don't think and calculate before expenditure.

Consumer may be ignorant. They may not be aware of other useful alternatives hence law of substitution does not take place.

Conclusions

Though there are limitations of this law , this law occupies an important place in economics. This is applied in various cases in economics.

Thank you.



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