The Law of Equi Marginal Utility is also called as the Law Of Indifference because the consumer, when he reaches the point of maximum satisfaction, becomes indifferent about any other combination of the commodities bought. The importance of Law of Equi Marginal Utility is great in Economics. Practical significance or importance of law of equi marginal utility is described below:
Practical Importance Of Law Of Equi Marginal Utility
1. Producer’s equilibrium : A wise producer combines different factors of production and substitutes one for the other to secure maximum profits. He continues his activity until the marginal returns from all factors equalized. For example, he may employ capital in stead of labor and labor instead of capital. He employs higher return factors in place of lower return factors. Then, only his cost of production will be Minimum. This may be expressed in the following equation
Marginal productivity of Goods A/Price of A =Marginal Productivity of goods B/Price Of B
2. Distribution : This law is also useful in the sphere of distribution. It determines the rewards to be paid to the different factors of production. A prudent producer continues to substitute one factor service for the other till the cost of employing each factor equals the marginal productivity of each factor.
3. Exchange : This law has importance in the determination of the prices of goods and services. In the case of substitutes, when the price of one goods increases the demand for the other goods increases. When the supply is limited, people like to purchase more quantity of a goods. Then its price increases. When the supply of a goods is greater than its demand, the price falls. As a result, people change their demand for the goods. This adjustment between scarcities and prices is possible due to the substitution of cheaper goods for costlier goods.
4. Public Finance : This law is also applicable in the sphere of Public Finance. Government imposes taxes in such a manner that the marginal sacrifice of each tax player is equal. Similarly in deciding about the projects and their total outlays, it implements only those projects which yield greater social marginal utility.
5. International Trade : This law is of Special importance in the domain of International Trade. This law helps the government in devising proper export and import policy for the promotion of economic development of the country. The government devises such a policy aiming at the export of lower marginal utility goods and import of higher marginal utility goods. It continues foreign trade till the marginal utilities from exports and imports become equal.
6. Planning : In Planning also this law has practical importance . Government follows this principle in allocating the scarce resources between different sectors. The plan objectives like social justice, economic progress, decentralization of industries, fair distribution of national income and wealth. removal of economic inequalities, eradication of unemployment, poverty etc. are achieved by the government through this law.
7. Distribution of Assets : This law is a boon to the speculators businessmen and entrepreneurs in acquiring the assets for different use. They compare the marginal returns and decide the distribution of assets. They substitute one asset for the other till their marginal returns are equalized.
8. Saving and expenditure : This law also plays an important role in determining the Proportion of savings and expenditure in one’s income. People save more income when marginal utility from savings is more than their expenditure. This involves substitution between savings and income.
Practical Importance Of Law Of Equi Marginal Utility is prevailed in micro and macroeconomics.