Explain how equi-marginal principle is used in business decision making process
Answers
Answer:
The principle of equi-marginal utility explains the behavior of a consumer in distributing his limited income among various goods and services. This law states that how a consumer allocates his money income between various goods so as to obtain maximum satisfaction.
Equi-marginal principle in Production Economics basically states that the ratio of Marginal Product and the price of the last unit of all the inputs/factors used in the production process is equal.
Explanation:
Equi-marginal principle is an extremely important concept in Managerial Economics.It is employed in the profit maximizing practices of the firm.It basically signifies that the firms will continue to hire factors/inputs of production until the additional productivity obtained from using one more unit of any factor or input is equal to the price paid by the firm to purchase or hire that one unit of factor.If the former is higher than the latter,the firms can ideally continue hiring more of the factor or input as it is earning more profit in the process.Therefore,the firm will stop hiring more factor/input once they are equal.Now,if the latter is greater than the former,the firms will not hire anymore factor/input as it will incur additional loss if it does.