Business
Equi-marginal Principle
The Equi-marginal Principle is a concept in economics that suggests that resources should be allocated in such a way that the marginal utility per dollar spent is equal across all goods and services. This principle helps businesses to maximize their utility and profits by allocating resources efficiently.
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3 Key excerpts on "Equi-marginal Principle"
- Zahid A. Khan, Arshad N. Siddiquee, Brajesh Kumar, Mustufa H. Abidi(Authors)
- 2018(Publication Date)
- Cambridge University Press(Publisher)
(iii) The assumption of constant marginal utility of money: This is necessary if the monetary unit is used as the measure of utility. The essential feature of a standard unit of measurement is that it be constant. 50 Engineering Economics with Applications (iv) The diminishing marginal utility: The utility gained from successive units of a commodity diminishes. This is the axiom of diminishing marginal utility. (v) Total utility: The total utility of a basket of goods depends on the quantities of the individual commodities. If there are n commodities in the bundle with quantities x 1 , x 2 , x 3 ,…, x n. , the total utility is U = f(x 1 , x 2 , x 3 ,…, x n ). In very early versions of the theory of consumer behavior, it was assumed that the total utility is additive, U = U 1 (x 1 ) + U 2 (x 2 ) + … + U n (x n ). The additivity assumption was dropped in later versions of the cardinal utility theory. Additivity implies independent utilities of the various commodities in the bundle, an assumption clearly unrealistic, and unnecessary for the cardinal theory. 2.3.4 Equilibrium of the Consumer Using the simple model of a single commodity x, the consumer can either buy x or retain his money income M. Under these conditions, the consumer is in equilibrium when the marginal utility of x is equated to its market price (P x ). Symbolically, we have, MU x = P x. If the marginal utility of x is greater than its price, the consumer can increase his welfare by purchasing more units of x. Similarly, if the marginal utility of x is less than its price, the consumer can increase his total satisfaction by cutting down the quantity of x and keeping more of his income unspent. Therefore, he attains the maximization of his utility when MU x = P x . If there are more commodities, the condition for the equilibrium of the consumer is the equality of the ratios of the marginal utilities of the individual commodities to their prices.
eBook - PDFAdam’s Fallacy
A Guide to Economic Theology
- Duncan K. Foley(Author)
- 2009(Publication Date)
- Belknap Press(Publisher)
At the point where eight, or seven, or six hours or less are devoted to sleeping, the individual may feel that the mar-ginal utility of an extra ten minutes of sleep is no longer higher than the marginal utility, say, of eating. The first ten or twenty minutes devoted to eating may lower the marginal utility of that activity to the next most pressing use, say, studying for a test in a course. (The individual may also have to sleep a few more minutes to drive the marginal utility of sleep minutes down to that of test-preparation minutes.) A similar story can be told about the allocation of money income or wealth. Throughout this process of allocation, the marginal utility of the scarce resource in all the uses to which it is being put must be equal (though all marginal utilities are falling as more of the resource is al-located), or else the agent could increase her total utility by reallocat-ing the scarce resource from a low to a high marginal utility activity. O n t h e M a r g i n s / 1 5 9 Thus Jevons arrives at his law of equalization of the “final degree” of utility. This way of looking at human affairs lends itself easily to the em-ployment of calculus, which here enters into an intimate relation with economic theory. One can write the allocation problem as a constrained maximization problem that can be solved by calculus methods. Jevons shows that this mathematical approach can be applied to the case of allocating a limited money income among several com-peting uses. The mathematical conditions for maximization require that the marginal utilities of a dollar spent on each use be equal. Thus Jevons argues that exchange on markets, where there is a single price for each commodity, leads to the equality of ratios of marginal utility to ratios of prices. This doesn’t prove, of course, that marginal utility ratios determine price ratios. In fact, the setting of the argu-ment assumes that market prices are already given.
eBook - PDFThe Economics Of Livestock Systems In Developing Countries
Farm And Project Level Analysis
- James R Simpson(Author)
- 2019(Publication Date)
- CRC Press(Publisher)
CHAPTER 3 OPTIMIZATION: MARGINAL PRINCIPLES AND LINEAR PROGRAMMING The how much question in production economics was touched on only briefly in the last chapter to avoid complicating the theoretical principles. Attention now turns to techniques for determining the optimal level of input, output and other resources, that is, the how much production decision. The first step is to define terms; then, an example is provided based on two alternative dairy operations, one with purebred cattle (Holstein) and the other with dual purpose (Zebu cross) cattle. The objective is to demonstrate how the optimal level of supplement feed is calculated and also to introduce the budgeting format. The latter part of this chapter focuses on the method for determining an optimal combination of livestock systems on one farm given constraints on land, labor and capital. The optimal dual-purpose system is then compared with a beef cow/calf enterprise. The objective is to show how, with graphic analysis, linear programming can be used to determine the optimal enterprise combination, that is, the what to produce decision. How Much Input to Use: Marginal Principles The concept of operating at the margin is related to the how much to produce production economics question. It will be recalled a con-clusion was reached in the last chapter that profit is maximized by producing in Stage II of the production function. The purpose of the present section is to explain the technique for determining the optimal level of input and output in that stage. Input Side Decision Rule The decision rule for determining the optimal input is this: Produce where marginal input cost (MIC) is equal to marginal value product (MVP). MIC is defined as the change in total input cost, or the addition to total input cost caused by using an additional unit of input. MIC is calculated by the equation
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