Importance of the law of equi-marginal utility

Importance of the law of equi-marginal utility. It is a fundamental law and is applicable in all the economic theory departments. “In Robbins’ words, “The application of the equi-marginal utility theory applies to almost any area of economic inquiry.” Some of the law’s major applications are in the following fields:

Consumption:

Each customer needs to achieve full satisfaction from his spending. If, as implied by this theory, a customer spends his income on various goods in such a way that the last unit of money spent on them generates equivalent marginal utilities, then he will get maximum satisfaction from his spending

Production:

The goal of any producer is to gain maximum profit. Different output factors, i.e. property, labor, capital, etc., must be used to accomplish this goal in such a way that the marginal productivity of and factor is equal. For this reason, the producer may often have to replace machinery with labor or, at other times, machinery with labor until the marginal output of each is comparable. It is through this modification of limited resources that a manufacturer will succeed in its objective of getting full profit.

Exchange:

This idea works in all our exchanges. Exchange is nothing more than one thing’s replacement for another. A person engaged in barter trade will continue to exchange his goods until their marginal utilities are equalized with those of other individuals. In the case of monetary transactions, if the marginal utility of the commodity equals the money spent on it, an individual will purchase a commodity. This legislation allows us to achieve price equality for a product in all parts of the market. It helps to mitigate the shortage of resources, as individuals begin to substitute more scarce items for less scarce items.

Price Determination:

The equi-marginal utility concept has an important influence on price determination. When a product is scarce, the law of substitution comes to our assistance. We are beginning to replace the more scarce and expensive items with less scarce or cheaper products. Therefore, the shortage of the above products is reduced and their costs are reduced. Demand for higher-priced products, on the other hand, decreases and their prices drop.

Distribution:

In the philosophy of distribution, the substitution principle plays a critical role. The distribution refers to the determination of the shares of different production factors, i.e. property, labor, capital, and industry. Distribution is done in such a way that, according to its marginal productivity, every factor gets its share of national revenue in the long-run. Factors must be mutually substituted in order to have such a distribution in such a way that the marginal productivity of each factor is equal to its remuneration and the marginal productivity of the various factors is equal to each other.

Public Finance:

In the area of public finance, the rule is still applicable. Taxes are levied in such a manner that each taxpayer’s marginal sacrifice is equal. The finance minister may substitute one tax for another in order to achieve this objective. Similarly, it is ensured at the time of spending funds that the marginal advantage of each form of public expenditure should be equal. If the government determines that spending more on building administrative quarters offers less social utility than on employee quarters, it can spend more on the latter and less on the former, so that the social marginal utility of each is comparable.

International Trade:

In international trade, a country observes the theory of substitution. It exports a product with a lower marginal utility and imports a product with a greater marginal utility. Until their marginal utilities become equal, this substitution continues. Thus, by the theory of substitution, full benefit from foreign exchange is obtained.

Asset distribution:

The equi-marginal concept also allows the individual to spread alternative types of mbhi5 assets, such as cash, bank deposits, bonds, stocks and shares or assets, or this Act, investment should be made in different asset types in such a way that the last unit of money invested in each form should yield equal marginal utility. Therefore, all types of assets can reap nearly equal psychological benefits and therefore enjoy full satisfaction.

Time allocation:

The equi-marginal concept refers to the allocation of 24 hours a day to various purposes, i.e. between work and recreation. For an hour’s more work, he must compare the marginal utility of profits to the marginal utility of leisure, which he must forgo.

Saving and investment:

profits should be divided between consumption and saving according to this law in such a way that the last unit of money spent on current consumption should yield the same utility as the last unit of money keeping in the form of saving. Optimum allocation is called such a distribution.

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