Equi-marginal principle

Equi-marginal principle is a fundamental concept in managerial economics that helps businesses allocate their resources efficiently. The principle states that resources should be allocated in such a way that the marginal benefit derived from each resource is equal.

For example, consider a company that has a limited budget and needs to decide how much to spend on advertising and how much to spend on product development. If the company spends all of its budget on advertising, it may see an initial increase in sales, but it may not be sustainable if the product is not of good quality. On the other hand, if the company spends all of its budget on product development, it may end up with a great product but not enough customers to buy it. The Equi-marginal principle suggests that the company should allocate its resources in such a way that the marginal benefit derived from each resource is equal.

Here are a few more examples of the Equi-marginal principle:

A business owner needs to decide how to allocate their time between different activities such as product development, marketing, and customer service. The Equi-marginal principle suggests that they should allocate their time in a way that maximizes the marginal benefit of each activity, so they can maximize their overall profits.

A restaurant owner needs to decide how many waiters to hire. The Equi-marginal principle suggests that they should hire waiters in such a way that the marginal benefit of each additional waiter is equal to the marginal cost of hiring them.

A farmer needs to decide how much fertilizer to apply to each crop. The Equi-marginal principle suggests that they should apply fertilizer in such a way that the marginal benefit of each additional unit of fertilizer is equal to the marginal cost of applying it.

In each of these examples, the Equi-marginal principle helps businesses and individuals allocate their resources in a way that maximizes their overall benefits. By balancing the marginal benefits and costs of each resource, they can make informed decisions and improve their efficiency.

Reference:

Salvatore, D. (2015). Managerial Economics in a Global Economy. Oxford University Press.

Keat, P. G., & Young, P. K. Y. (2009). Managerial Economics: Economic Tools for Today’s Decision Makers. Prentice Hall.