Perfect Competition Equi-marginal principle. This principle is also known the principle of maximum satisfaction. According to this principle, an input should be allocated in such a maimer that the value added by the last unit of input is same in all uses. In this way. The equi-marginal principle can be applied in different areas of management. It is used in budgeting.
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We know that human wants are unlimited whereas the means to satisfy these wants are strictly limited. Of the things that he decides to buy he must buy just the right quantity. Every prudent consumer will try to make the best use of the money at his disposal and derive the maximum satisfaction.
It other words, we substitute some units of the commodity of greater utility tor some units of the commodity of less utility. The result of this substitution will be that the marginal utility of the former will fall and that of the latter will rise, till the two marginal utilities are equalized. That is why the law is also called the Law of Substitution or the Law of equimarginal Utility. Suppose apples and oranges are the two commodities to be purchased. Suppose further that we have got seven rupees to spend.
Let us spend three rupees on oranges and four rupees on apples. What is the result? The utility of the 3rd unit of oranges is 6 and that of the 4th unit of apples is 2. As the marginal utility of oranges is higher, we should buy more of oranges and less of apples. Let us substitute one orange for one apple so that we buy four oranges and three apples.
This arrangement yields maximum satisfaction. The satisfaction given by 4 oranges and 3 apples at one rupee each is greater than could be obtained by any other combination of apples and oranges.
In no other case does this utility amount to We may take some other combinations and see. We thus come to the conclusion that we obtain maximum satisfaction when we equalize marginal utilities by substituting some units of the more useful for the less useful commodity. We can illustrate this principle with the help of a diagram. On X-axis OX are represented the units of money and on the Y-axis marginal utilities. Suppose a person has 7 rupees to spend on apples and oranges whose diminishing marginal utilities are shown by the two curves AP and OR respectively.
Any other combination will give less total satisfaction. Hence the total utility of this new combination is less. Limitations of the Law of Equimarginal Utility: Like other economic laws, the law of equimarginal utility too has certain limitations or exceptions.
The following are the main exception. On account of his ignorance he may not know where the utility is greater and where less. Thus, ignorance may prevent him from making a rational use of money. This is so because he may not be able to divert expenditure to more profitable channels from the less profitable ones. In such cases, there is no need of diverting expenditure from one direction to another.
In that case, he will not be able to derive maximum satisfaction out of his expenditure, because he cannot give up the consumption of such commodities. The consumer may not be able to make the necessary adjustments in his expenditure in a constantly changing price situation.
Everybody has got limited income. Naturally he must try to make the best use of it. His expenditure is so distributed that the same price measures equal utilities at the margin of different purchases. Every person must try to spend his income in a manner which yields him the greatest satisfaction. The producer has to use several factors of production. He wants maximum net profit. When we sell a commodity, say, sugar, we get money.
With this money, we buy another commodity, say, wheal. We have, therefore, really substituted sugar for wheat. The use of each factor is pushed up to a point where its marginal product is equal to the marginal product of every other factor, of course after allowing for the differences in their respective remunerations.
This necessitates substituting one factor for another. The public revenues are so spent as to secure maximum welfare for me community. The Government must cut down all wasteful expenditure while the return is not proportionate and instead concentrate its resources on more productive or more beneficial expenditure.
When a commodity becomes scarce and its price soars high, we substitute for it things which are less scarce. Its price, therefore, comes down.
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Law of Equimarginal Utility: Explanation, Limitations and Other Details
Any other allocation of the last dollar shall give less total utility to the consumer. The same information can be used for graphical presentation of this law: The diagram shows that consumer has income of six dollars. He wants to spend this money on apples and bananas in such a way that there is maximum satisfaction to the consumer. Limitations: 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. The law is not applicable in case of indivisible goods.
Principle of Equi-Marginal Utility (Explained with Diagram)
The principle of equi-marginal utility explains the behavior of a consumer in distributing his limited income among various goods and services. This law states that how a consumer allocates his money income between various goods so as to obtain maximum satisfaction. Let us assume there are only three commodities available in the market, A, B and C. Note that diminishing marginal utility sets in immediately for each of the three products. Let us consider each dollar spent.
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