Equi-marginal principle.
Equi-marginal principle is one of the widely used concepts in managerial economics. This principle is also known the principle of maximum satisfaction - by allocating available resource to get optimum benefit . This principle provides a basis for maximum utilization of all the inputs of a firm so as to maximize the profitability.
In the practical world, a person may purchase more then one commodity. Let us assume that a consumer purchases two goods A and B. How does a consumer spend his fixed income in purchasing two goods in order to maximize his total utility? The law of equi-marginal utility tells us the way how a person maximizes his total utility.
The equi-marginal principle can also be applied in time allocation problems such as studying for examinations. Suppose you have 3 examinations tomorrow and you only have 9 hours to study today (a usual case for students who cram during exams!). The subjects covered are Economics, English and Mathematics. Your objective is to maximize the average of your grades in these 3 subjects with your limited study time. In other words, how should you allocate your 6 hours of study time such that the marginal grade (or additional grade) from the last hour of studying spent in one subject is just equal to the marginal grade from the last hour of studying spent in any of the other subjects? If you answer, “I’ll divide my lime equally among the 3 subjects", that may not really be the most practical (or if you prefer, strategic) thing to do. Why?
Because there will always be difficult and easy subjects for you such that you will have to spend longer hours for a difficult subject while it will take you only a few minutes to study for an easy one. Of course, the perceived level of difficulty among subjects is relative. The marginal grade may be represented by the additional grade that you expect to get in each of the subjects from each additional time that you spend studying for each and the level of difficulty of the subject concerned.
The equi-marginal principle can be applied in different areas of management. It is used in budgeting. The objective is to allocate resources where hey are most productive. It can be used for eliminating waste in useless activities. It can be applied in any discussion of budgeting. The management can accept investments with high rates of return so as to ensure optimum allocation of capital resources. The equi-marginal principle can also be applied in multiple product pricing. A multi product firm will reach equilibrium when the marginal revenue obtained from a product is equal to that of another product or products. The equi-marginal principle may also be applied in allocating research expenditures.
Rule:
This principle suggests that available resources (inputs) should be so allocated between the alternative options that the marginal productivity gains (MP) from the various activities are equalized.
Definitions
In the words of Ferguson, "Law of equi-marginal utility states that to maximise utility, consumers way allocate their limited incomes among goods and services in such a way that the marginal utilities per dollar (rupee) of expenditure on the last unit of each good purchased will be equal"
According to Marshall, "if a person has a thing which he can put to several uses, he will distribute it among these uses in such a way that it has the same marginal utility in all"
Lipsey is of the view that, "The consumer maximising his utility wilt so allocate expenditure between commodities that the utility derived from the last unit of money spent on each is equal"
Example: students allocating limited available days for existing subjects during examinations for getting best percentage. 14 days to go for examinations and having 7 subjects. Students may not always allot 2 days for each subject, they may allot more days for hard subject and less days for easy subject to maintain good percentage.
Let us consider the meaning of the term marginal'. Marginal unit is one which marks an addition to the total number of units. For example, a firm employing ten workers will say that the tenth worker is the marginal worker. A firm producing one thousand units of its product may decide to produce ten more units and the tenth unit over and above the 1009 units becomes the marginal unit. When we say that the decision is taken at the margin we mean the following : the wage-rate has got to be equal to the productivity of the marginal worker, which means that no worker gets more than what the marginal worker produces. Similarly, the price of the product has got to be equal to the marginal utility derived by consuming that product. Is it profitable to bring one more acre of land under cultivation ? The answer is : So long as every additional unit of land produces more than enough to meet the cost, the process of adding acres under cultivation would continue. The process would stop at that point were the value of the product of the marginal acre of land produces just equal to cover the cost of production.
Example:
Equi-marginal principle is applied in the allocation of the resource in the way of production. Example a farmer is having different four agricultural farms like
1. Paddy
2. Mangoes
3. Sugar cane
4. Corns.
The above four agricultural farms are in the total 80 acres, each farm in the 20 acres, all together 80 acres. The farmer is having limited 80 employees with him for employing in the four farms for production. In general, 80 employees are divided and employed for four farms evenly as each farm will be allotted with 20 employees. However, in reality there is no need to allot 20 employees for each farm, because mango farm need less number of employees, whereas paddy farm needs more number of employees. Sugarcane and corn farms require average number of employees. Like shown below
The above table reveals the allocation of the resources (labour) available with a farmer according to the level of output or production nature and requirement.