Limitations Of Law Of Equi Marginal Utility

Limitations Of Law Of Equi Marginal Utility
Reviewed by Hammad Naziron Apr 01 2013
Rating: 5

Limitations of the Law of Equi marginal Utility

Limitations:
The Law of Equi - marginal utility is a mere statement of tendency. The actual expenditures of the consumer may not conform to this Law of Equi marginal Utility because of the following reasons.
Following are some imoportant Limitations of the Law of Equi marginal Utility:

1)  Careful Calculations:
This law of Equi marginal Utility involves very careful calculations of the expected satisfaction and its comparison with the amount of money spend on various goods. It also involves a careful calculation of the utility derived by spending the same amount in some other direction. In actual practice there is not much conscious calculation and careful weighing of utilities as much of our expenditure is governed by habits and customs.

2)  Rational Behavior Of Customer:
It can not be expected of the consumer to act rationally. Only in case of big expenditure a rational consumer goes through certain thinking and his expenditure may roughly conform to this principle. This Law of Equi marginal Utility however, does not apply in case of small purchases.

3)  Ignorance Of Consumer
Ignorance of the consumer imposes another limitation. The consumer may not be aware of the other useful alternatives. This makes this Law of Equi marginal Utility inoperative.

4)  Customs And Fashions:
Peoples are sometimes slaves of customs or fashions, and are incapable of rational consumption. They are thus deprived of having maximum utility.

5)  Budget Period:
Another limitation arises from the fact that there is no definite budget period in case of individual.

6)  Indivisibility Of Commodities:
Indivisibility of certain commodities also makes the operation of this Law of Equi marginal Utility difficult.

7)  This principle is based on the ordinal measurement of utility and the constancy of the marginal utility of the money. These assumptions have been discarded by modern economists.

Practical Importance Of The Law Of Diminishing Marginal Utility:

Practical Importance Of The Law Of Diminishing Marginal Utility:
Reviewed by Hammad Naziron Apr 01 2013
Rating: 5

Practical importance of the law Of Diminishing Marginal Utility:

Importance of the law Of Diminishing Marginal Utility
The law of diminishing marginal utility has great practical importance in economics.

Let us explain the importance of the law Of Diminishing Marginal Utility:

1) The law of Marginal Utility and the Law of Demand:
The law of Marginal Utility and the Law of Demand are closely related with each other. The law of diminishing marginal utility is the base of the law of demand. According to law of diminishing marginal utility, the more we have of a good, the less we want additional increment of it. So as a person gets more and more of a particular commodity, the marginal utility of the successive unit begins to diminish. So every consumer while buying a particular commodity compares the marginal utility of a commodity and the price of the commodity that he has to pay. If the marginal utility is higher than the price, he purchases the commodity. As he buys more and more, the marginal utility begins to diminish. Then he pays fewer amounts for the successive units. So it is clear that the law of diminishing marginal utility and the law of demand are closely related.

2) Consumer Surplus:
The theory of consumer surplus is also based on this law of Diminishing Marginal Utility. A consumer while purchasing the commodity compares the utility of the commodity with that of price which he has to pay. In most of the cases he will to pay more than what he actually pays. The excess of the price which he would be willing to pay rather than to go with out the thing over that which he actually does pay is the economic measure of this surplus satisfaction.

3) Distribution of Expenditure:
A consumer in order to get the maximum satisfaction from his scarce income, distributes his income on goods and services in such a way that the marginal utility from all the uses are the same. Here, again the concept of marginal utility helps the consumer in arranging his scale of preferences for the commodities.

4) System of Taxation:
The law of diminishing marginal utility also helps in making of a tax policy. A finance minister knowing this fact that the marginal utility of money to a rich man is low and a poor man high, basis the system of taxation in such a way that rich persons are taxed at a progressive rate. The system of modern taxation, is therefore, based on the law of diminishing marginal utility.

Assumptions and Limitations of the Law of Diminishing Marginal Utility:

Assumptions and Limitations of the Law of Diminishing Marginal Utility:
Reviewed by Hammad Naziron Apr 01 2013
Rating: 5

Assumptions and Limitations of the Law of Diminishing Marginal Utility:
Here we briefly study the Assumptions and Limitations of the Law of Diminishing Marginal Utility.

Let us discuss them one by one.

Assumption of the Law of Diminishing Marginal Utility:

This law of diminishing marginal utility will be true under the following Assumptions:

1) Consumption to be continuous:
It is assumed that the consumption of commodity should be continuous. If there is interval between the consumption of the same two units of the commodity, the law of diminishing marginal utility may not hold good.

2) Reasonable units:
The 2nd assumption of the law of diminishing marginal utility is that the commodity consumed is taken as suitable and reasonable units. If units are too small, then the marginal utility instead of falling may increase up to a few minutes.

3) Character of the consumer does not change:
The law of diminishing marginal utility holds true if there is no change in the character of the consumer. For example a consumer develops a taste for tea; the additional units of tea may increase the marginal utility to an addict.

4) No change in Fashion or Taste:
If there is a sudden change in fashion, custom, or taste of a consumer, it can make the law of diminishing marginal utility inoperative.

5) Change of Income:
If there is a change in the income of the consumer, the law may not operate.

Limitations of the law of Diminishing Marginal utility:

Following are some limitations of the law of Diminishing marginal utility.

1) Knowledge:
The desire to acquire knowledge increase as a person gets the education.

2) Wealth:
The law of diminishing marginal utility does not affect the stock of wealth, because a person who has a large amount of wealth, his desire to have more wealth increases as the stock of wealth increases.

Presentataion Of The Law of diminishing marginal utility

Presentataion Of The Law of diminishing marginal utility
Reviewed by Hammad Naziron Apr 01 2013
Rating: 5

Law of Diminishing Marginal Utility:

Explanation of the Law of diminishing marginal utility with the help of Schedule and Diagram.

Introduction of the Law of diminishing marginal utility:
The concept of diminishing marginal utility was introduced in 1871. It is a common experience of every consumer that as utility goes on diminishing. This tendency on the part of marginal utility to diminish with every increase in the stock of a commodity is called the law of diminishing marginal utility.

Statement of the Law of diminishing marginal utility:
Marshall has stated this law as,

"The additional benefit which a person derives from an increase of his stock of a commodity diminishes with every increase in the stock that he already has".

Explanation of the Law of diminishing marginal utility
We explain the law of diminishing marginal utility by a very simple example. Suppose a man is very thirsty. He starts drinking glasses of water. The first glass of water gives him greater utility. When he takes 2nd glass of water, the utility will be less than the 1st glass. It is because the edge of his thirst has been blunted. If he drinks 3rd glass of water, the utility of the 3rd glass will be less than that of 2nd and so on..
The utility goes on diminishing with the consumption of every successive glass of water till it drops down to zero. If the consumer is forced to take a glass of water, the utility will become negative.

Explanation of the Law of diminishing marginal utility with the help of Schedule.

Table:

Units	Total Utility	Marginal Utility
1st Glass	06	6
2nd Glass	10	4
3rd Glass	12	2
4th Glass	12	0
5th Glass	10	-2
6th Glass	06	-4

From the table it is clear that in a given period of time, the first glass of water to a thirsty man gives 6 units of utility. When he takes 2nd glass of water, the marginal utility goes down to 4 units. When he consumed 4th glass of water the marginal utility drops down to zero and it the consumption if water is forced further from this point, the utility change into dis utility.

Explanation of the Law of diminishing marginal utility with the help of Diagram:

Diagram:

In this diagram we measure MU along with OY and units of commodity along with ox. The utility of 1st glass of water is 6 units, the utility of 2nd glass of water is 4 and so on. The fourth glass yields zero utility and 5th and 6th glass yields negative utility. MU is the marginal utility curve which has a left to right downward trend and shows that as consumer consumes the successive units of a commodity, MU diminishes with the addition of every unit.