Interpret the Law of Equi-marginal Utility. [8]
OR
Describe the determining factors of the elasticity of demand in detail.
Answers
Law of Equi-Marginal Utility explains the relation between the consumption of two or more products and what combination of consumption these products will give optimum satisfaction. Marginal Utility is the additional satisfaction gained by consuming one more unit of a commodity.
Assumptions of Law of Equi-Marginal Utility
Units of goods are homogenous.
No time gap between the consumption of the different units.
Tastes, fashion, preferences, and priorities remain unchanged.
Consumer aims at maximum satisfaction.
Consumer’s income is fixed and limited.
There are some limitations to this law. They are
The law is not applicable in case of knowledge. Reading books provides more knowledge and has more utility.
This law is not applicable in case of fashion and customs.
This law is not applicable for very low income.
There is no measurement of utility.
Not all consumer care for variety.
The law fails when there are no choices available for the good.
The law fails in case of frequent price change.
Importance of the Law
This law is helpful in the field of production. A producer has limited resources and tries to get maximum profit.
This law is helpful in the field of exchange. The exchange is of anything like some goods, wealth, trade, import, and export.
It is applicable to public finance.
The law is useful for workers in allocating the time between the work and rest.
It is useful in case of saving and spending.
It is useful to look for substitution in case of price rise.