Current Category » Law of Equi Marginal Returns The law of Equi-marginal returns is concerned with the allocation of the limited amount of resource among different enterprises. With a given expenditure a rupee has a certain utility for him: this utility is the marginal utility of money by him. In case of durables, such definiteness is not possible and practical because they give utility for a long period because of their nature. The producer continues to substitute one factor for the other, till this objective is achieved. This law establishes an input- output relationship, which applies very fast in agriculture. But if a farmer is investing his amount of Rs. It claims that a rational decision-maker would certainly allocate or hire resources in a fashion that the ratio of marginal returns and marginal costs of various uses of a provided resource or of various resources in a given use is the same.
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. The law fails to operate in case of laziness of consumers. This process of substitution will continue, till the ratios for the factors become equal. Though the law of equi-marginal utility appears to be very convincing, the following arguments are advanced against it: Firstly, the utility derived from commodities is not measurable in cardinal numbers. In real life we see that all these variables go under change. Buyers and sellers are exchanging goods for goods or goods for money and both the parties will maximise their satisfaction at the point where the marginal utility of a commodity is equalised till the sacrifice in terms of money is equalised. He should spend the amount, in such a way that he will get maximum profit.
His expenditure is so distributed that the same price measures equal utilities at the margin of different purchases. This is so because he may not be able to divert expenditure to more profitable channels from the less profitable ones. Addition to Income from the Marginal Amount of Rs. The management can accept investments with high rates of return so as to ensure optimum allocation of capital resources. Gossen posited the two basic laws of utility, the and the Law of Diminishing marginal returns. It can be seen from the following table: The table reveals that the consumer has Rs.
They are- 1 A consumer goes on consuming different quantities of commodities until the marginal utilities derived from them are equal. It helps us in maximisation of social welfare. Other things remaining the same, the farmer will put the land under potato foregoing wheat which is the second best alternative. In figure 1, X-axis measures units of money spent on commodity X and Y, or units of commodities X and Y consumed. Thus, the utility of the fourth hamburger is found by subtracting the utility of four hamburgers from the utility of three hamburgers. However, his wants are unlimited. It is based on the law of diminishing marginal utility.
They can compare the marginal utility of work and the marginal utility of rest. In this case, the law loses its credibility. In the same manner, a manufacturer in search of maximum profit would use the technique of production input-mix. The equi-marginal principle may also be applied in allocating research expenditures. The farm resources are land, labour, capital, organization management , enterprise. Hence, it is not an economic law because it is a psychological and subjective based law.
The bars are showing the marginal utility from different units of the commodities which are declining showing the applicability of the law of diminishing marginal utility. Thus, we can say that the law of equi-marginal utility is widely applicable law and it is important from any aspect of any economic activity. Average product is the result of total product at a particular level of input used divided by the level of input used. Example of The Law of Equi-Marginal Utility: If commodity X gives higher marginal utility than the other two commodities, he substitutes more of commodity X in place of Y and Z, in this way, he goes on buying high marginal utility commodities instead of low marginal commodities by distributing his limited income in an economical way. Or consumers may be influenced by advertising and purchase on impulse.
This leads to the equimarginal principle that I should arrange my consumption so that every single good is bringing me the same marginal utility per dollar of expenditure. For example, if one bought two shirts and one hamburger, the extra satisfaction from a dollar spent on shirts is only four and one half utils, whereas shifting money to hamburgers would allow one to get seven utils per dollar. Maximization occurs when the return on the last dollar spent is the same in all areas. A consumer has a given income which he has to spend on various goods he wants. The table can be shown in the form of diagram. Determining enterprise relationship as complementary, or competitive. This is specially true of the conventional necessaries like dress or when a man is addicted to some intoxicant.
Cultivator has limited capital and his main objective is to maximise net profit. In the case of inequality in the above equation, the producer will substitute the factor which gives him more productivity for the factor which gives him less productivity. We can illustrate this principle with the help of a diagram. The consumer is unable to divide the goods to adjust units of utility derived from consumption of goods. We therefore, conclude that the consumer derives maximum satisfaction when he is allocating money expenditure among different commodities in such a way that the marginal utility of money spent on each of them is the same. The dollar spent on shirts gave a much larger return, and if he could shift money from the area in which it is giving a low return to the area in which it has a high return, he will be better off.
Explanation of the Law of Equi-Marginal Utility 3. The farmers of region will specialize in paddy cultivation. It deals with the multi-commodity consumer behaviour when a consumer consumes different units of different commodities with his given income and maximises his satisfaction. Therefore, the applicability of the law is doubtful. For this, the understanding of the basis of international trade, of which the law of comparative advantage, is very important. As we have seen, Rs. Hence, a rational individual tries to optimize the available scarce resources in order to attain maximum satisfaction.