What are the limitations of the Law of Equi-marginal utility? we know that there are important assumptions of the law, but there are several limitations of the law which are dicuss below;
LIMITATIONS OF THE LAW OF EQUI-MARGINAL UTILITY :
The main limitations of the Law are given below;-
(i) QUANTITATIVE MEASUREMENT OF UTILITY: Utility represents our feelings of satisfaction. The consumer only imagines the numerical value of the commodity in the form of utils. It is not possible to actually quantify it, because it is only hypothetical. In other words, cardinal measurement of utility is not possible, hence, it is a limitation of the law.
(ii) INDIVISIBILITY OF CERTAIN ARTICLES : we are able to get the marginal and total utility of small items because they are divisible such as apples or any other type of fruits, bottles drinks etc. However, when it comes to big items such as fridge, television, cars etc, it is not possible to get their equi-marginal utility as the products are indivisible.
(iii) TIME PERIOD : When measuring the marginal and total utility of perishable goods such as” food, we are able to get a definite answer. However, when we consider the case of durable goods this law does not hold. The reason is that the life time of these items is not the same, for example a pen and a watch. Based on the fact that these two items are consumed continuously, the watch will have a longer life, hence this law does not hold.
(iv) IGNORANCE OF CONSUMERS : Generally the consumers do not care very much for the price that they are paying for a certain item, e.g., at one shop the consumer purchases a pen for Rs. 20, but when he goes into another shop he finds that the similar pen is of Re. 10. Hence, the consumer is not able to attain maximum satisfaction.
(v) CARELESSNESS OF CONSUMERS : In the case of usage of commodities under certain customs/traditional. a heavy price is paid for a negligible amount of utility obtained, e.g., for a wedding ceremony, a bride purchases a dress for Rs. 10,000, just for the sake of using it once. In this case it becomes difficult to equalize the marginal utility of different goods and also difficult to maximize total utility under the law of equi-marginal utility,
PRACTICAL IMPORTANCE OF THE LAW OF EQUI-MARGINAL UTILITY:
(i) GUIDANCE FOR CONSUMERS : Any prudent consumer would naturally desire maximum total utility for the most minimum expenditure possible. In arranging his expenditure until he meets this point, he will have to substitute a good with a greater utility, for one that possesses less utility, until the marginal utilities of the commodities purchased are equalized. Thus, he will attain optimum use of these commodities, e.g. in our previous case of oranges and 7-Up, the consumer purchased less of 7-Up because its marginal utility was greater than that of
oranges Rs.3 of oranges gave him a total utility of 60 utils and additional 30 utils for Rs. 2 of 7-UP’ hence his expenditure of Rs. 5 gave him total utility of 90 utils:
(ii) GUIDANCE FOR ENTREPRENEURSHIP : Marginal productivity theory has been derived from the law of Equi-marginal utility. This theory enables a producer to maximize total production and profit combining the factors of production, i.e. land, labour, capital and entrepreneurship at the most possible minimum cost. Produce equilibrium is also called least cost of factors of production “or” optimum combination of factor of production. ” If however the producer detects the marginal productivity of one of the factors is greater than the other e.g. land’s marginal productivity is greater than that of capital’ marginal productivity, it will benefit him to substitute the land for the capital in order to get maximum profit.
(iii) GUIDANCE FOR THE FINANCE MINISTER; The Finance Minister has two duties, one to impose taxes, and the second is to take care of welfare expenditure. In the case of imposing tax, he has to always have in mind that the community consists of two main classes or categories High Class and Low Class people. The former, being more wealthy, naturally will be taxed more than the latter. But the question is” How much more “? and How much Less “? the plain is to high class community feels on the payment of taxes is not as bad as how it is felt by the lower class community. e.g. If the High class community that earns Rs. 100000/- annually has to pay Rs. 10000/- as tax each year, the same rate cannot be imposed on lower class community with a equally a monthly income of Rs. 10000/-. Therefore, in order to equally distribute the burden of taxation on the whole society so that the marginal sacrifice of all tax-payers is equalized, the Finance Minister will refer to this law. The money being spent has to be divided in such a way that the marginal social welfare of expenditure on different projects is equalized. In this way maximum social welfare will be attained.
iv) GUIDANCE FOR FAIR DISTRIBUTION OF WEALTH IN THE SOCIETY : In accordance with the producer’s equilibrium, marginal product of the four factors of production is to be equalized and the marginal product of each factor is also to be equal to its respective reward. This would be the equal distribution of wealth or income in a country. Thus, with the attainment of the producer’s equilibrium fair distribution of wealth can be achieved in the whole society.