THE EQUIMARGINAL PRINCIPLE

The thing that has to be noted is that the number of things being utilized is decreasing as we go down the table. This happens for each and every product. This is called as the law of diminishing marginal utility.

It is based on the observations that are made in the daily life. In the case of beers, the first four may seem good, but when you are trying to have the fifth one, you are not that interested as you were while having the first one. The same way, the first hamburger gives you great pleasure, the next one will be a little less, and this keeps decreasing with each burger.

 

The Equimarginal Principle, or How to Spend Your Last Dollar

 

Number              Marginal Utility of Shirts                          Marginal Utility of Hamburgers

First                                   11                                                                       8

Second                               9                                                                        7

Third                                  7                                                                         6

Fourth                               4                                                                         5

Fifth                                   1                                                                         4

 

In case the person is taking two shirts and three hamburgers as an optimal solution, we can say that he has spent money incorrectly. This can be done when the cost of both A shirt and a hamburger are the same. Let us assume it to be one dollar each. In case he ahs only five dollars to spend, and the last item he gets is a hamburger, then he gets only 6 utils. But in case if he spends the last dollar on the shirt, then he gets 9 utils.

It shows that the dollar spent on the shirt is giving him more returns than that spent on the hamburgers. If he can shift from hamburger to shirt, as it is giving him more returns than hamburgers, it is called as the equimarginal principal. In this case, all he needs to do would be spend a dollar more on shirts instead of spending the last one on the hamburgers. This way he would benefit more.

This is true as the rate of both the shirt and the hamburger are the same. But is would have been a totally different case if the rates of both these goods were different and not equal like here. It can be given as:

(Marginal Benefit of A)/(Price of A) = (Marginal Benefit of B)/(Price of B)

 

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