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Equi Marginal Principle

Economics notes

Equi Marginal Principle

➡️ Diminishing marginal utility is an economic concept that states that as a consumer consumes more of a good or service, the satisfaction they receive from each additional unit of the good or service will decrease.

➡️ This concept is important to understand when making decisions about how much of a good or service to purchase, as it can help to inform the optimal amount of consumption.

➡️ Diminishing marginal utility can also be used to explain why prices tend to increase as demand increases, as the additional satisfaction from each additional unit of the good or service decreases.

What is the equi marginal principle in economics?

The equi marginal principle is a concept in economics that states that a rational consumer will allocate their resources in such a way that the marginal utility per dollar spent is equal across all goods and services.

How does the equi marginal principle apply to production decisions?

The equi marginal principle can also be applied to production decisions, where a firm will allocate its resources in such a way that the marginal cost of producing each unit of output is equal across all products.

What are some limitations of the equi marginal principle?

One limitation of the equi marginal principle is that it assumes that consumers and firms have perfect information and can accurately calculate the marginal utility or cost of each good or service. In reality, this may not always be the case, leading to suboptimal resource allocation. Additionally, the equi marginal principle does not take into account externalities or market failures, which can also impact resource allocation.

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