Importance of Equi-Marginal Utility Law

Importance of Equi-Marginal Utility Law

According to Marshall, 'the applications of this principle extend over almost every field of economic activity.'

1. It applies to consumption

Every rational human being wants to get maximum satisfaction with his limited means. The consumer arranges his expenditure in such a way that,   M U x/Px    =       M U y/Py    =          M Uz/ P z    so that he will get maximum satisfaction.

2. It applies to production

The aim of the producer is to get maximum output with least-cost, so that his profit will be maximum. Towards this end, he will substitute one factor for another till

MPl / Pl = MPc / Pc = MPn / Pn

3. Distribution of Earnings Between Savings and Consumption

According to Marshall, a prudent person will endeavour to distribute his resources between his present needs and future needs in such a way that the marginal utility of the last rupee put in savings is equal to the marginal utility of the last rupee spent on consumption.

4. It applies to distribution

The general theory of distribution involves the principle of substitution. In distribution, the rewards to the various factors of production, that is their relative shares, are determined by the principle of equi-marginal utility.

5. It Applies to Public Finance

The principle of 'Maximum Social Advantage' as enunciated by Professors Hicks and Dalton states that, the revenue should be distributed in such a way that the last unit of expenditure on various programmes brings equal welfare, so that social welfare is maximised.

6. Expenditure of Time

Prof. Boulding relates Marshall's law of equi-marginal utility to the expenditures of limited time, i.e. twenty-four hours. He states that a person should spend his limited time among alternative uses such as reading; studying and gardening, in such a way that the marginal utility from all these uses are equal.