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Limitations of the Law of Equi-marginal Utility

Limitations of the Law of Equi-marginal utility Like other economic laws, the Law of Equi-marginal Utility too is a mere statement of a tendency. The actual expenditure of individuals may not actually conform to this law. This may be due to the following limitations: 1. No Rational and Conscious Calculations- The Law of Equi-marginal Utility involves very careful calculations of the expected satisfaction and its comparison with the amount of money spent as well as with the satisfaction which may be derived by spending the same amount of money in some other direction. But how many of us are competent of making such fine calculations? How many of us have the patience and the ability to do it? Are we all so rational and calculating?

Limitations of the Law of Equi-marginal utility

Like other economic laws, the Law of Equi-marginal Utility too is a mere statement of a tendency. The actual expenditure of individuals may not actually conform to this law. This may be due to the following limitations:

1. No Rational and Conscious Calculations- The Law of Equi-marginal Utility involves very careful calculations of the expected satisfaction and its comparison with the amount of money spent as well as with the satisfaction which may be derived by spending the same amount of money in some other direction. But how many of us are competent of making such fine calculations? How many of us have the patience and the ability to do it? Are we all so rational and calculating? The fact is that most of our expenditure is governed by habit. There is not much of conscious calculation and careful weighing of the utilities.

Only in the case of big expenditure, a prudent person goes through a certain amount of thinking. Here we may take it that this expenditure does roughly conform to the law of Maximum Satisfaction.

The utmost that we can say is that all rational and prudent persons are expected to act upon this law consciously or unconsciously

2. Ignorance of Consumers- Ignorance of consumers imposes another limitation. The consumers may not be aware of other useful alternatives. Hence no substitution takes place and the law of substitution does not operate.

3. Customs and Fashions-People are sometimes slaves of custom or fashion and are incapable of rational consumption. Without being rational and calculating a consumer cannot substitute one thing for another. This is another limitation of the law.

4. Indivisibility of Goods- Another limitation arises from the fact that all goods are not divisible into small bits to enable consumers to equalize marginal utilities. In actual practice, therefore, the marginal utilities cannot be equalized. The law remains only on a theoretical plane.

5. No Fixed Accounting Period- There is no definite budget period in the case of individuals. Even if there is a fixed accounting period, the application of this principle is rendered difficult by the varying degrees of durability of the goods consumed. A durable goods is available for consumption in several succeeding accounting periods. It is not, therefore, easy to bring it into the account of income and expenditure of a particular accounting period to see if satisfaction has been maximized during that period.

6. Questionable Assumptions- In the theory of consumer's equilibrium, the basic criticism of the law of Equi-marginal utility is that it rests on some questionable assumptions. For example, we assume that utilities can be added and compared; that during successive purchases, the marginal utility of money to the consumer remains constant .The modem economists criticize both these assumptions. The indifference curve approach to the theory of consumer's equilibrium is based on this basic criticism of the Marshallian analysis.

In spite of these points of criticism, the law of equi-marginal utility occupies a very important place in economic theory. Whether it is a case of consumer's equilibrium, producer's equilibrium, allocation of resources or distribution of the national income among the productive resources, this law has a determining influence according to Marshallian analysis.

 

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