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The law of equi marginal utility was presented in 19th century by an Australian economists H. H. Gossen. It is also known as law of maximum satisfaction or law of substitution or Gossen’s second law. A consumer has number of wants. He tries to spend limited income on different things in such a way that marginal utility of all things is equal. When he buys several things with given money income he equalizes marginal utilities of all such things. The law of equi marginal utility is an extension of the law of diminishing marginal utility. The consumer can get maximum utility by allocating income among commodities in such a way that last dollar spent on each item provides the same marginal utility.
“A person can get maximum utility with his given income when it is spent on different commodities in such a way that the marginal utility of money spent on each item is equal”.
It is clear that consumer can get maximum utility from the expenditure of his limited income. He should purchase such amount of each commodity that the last unit of money spend on each item provides same marginal utility.
Assumptions of the Law of Equi Marginal Utility:
1)There is no change in the prices of the goods.
2)The income of consumer is fixed.
3)The marginal utility of money is constant.
4)Consumer has perfect knowledge of utility obtained from goods.
5)Consumer is normal person so he tries to seek maximum satisfaction.
6)The utility is measurable in cardinal terms.
7)Consumer has many wants.
8)The goods have substitutes.
1)The law is not applicable in case of knowledge. Reading of books provides more satisfaction and knowledge to the scholar. Different books provide variety of knowledge and satisfaction.
2)The law is not applicable in case of indivisible goods. The consumer is unable to divide the goods to adjust units of utility derived from consumption of goods.
3)There is no measurement of utility. It is psychological concept. It is not possible to express it into quantitative form.
4)The law does not hold well in case fashion and customs. The people like to spend money on birthdays, marriages and deaths.
5)The does not hold well in case of very low income. The maximization of utility is not possible due to low income.
6)The law is not applicable in case of durable goods. The calculation of marginal utility of durable goods is impossible.
7)The law fails when goods of choice are not available. The consumer is bound to use commodity, which provides low utility due to non availability of goods having high utility.
8)There are certain lazy consumers. They do not care for maximum utility. The law fails to operate in case of laziness of consumers. They go on consuming goods with comparing utility.
9)It does not work when there are frequent prices changes. The consumer is unable to calculate utility of different commodities. Changing price levels create confusion in the minds of consumers.
10)There may be unlimited resources. The does not work due to unlimited resources. There is no need to change the direction of expenditure from one item to another when there are gifts of nature.