equimarginality

Equimarginality is an economic principle that describes the optimal allocation of a scarce resource among different uses to maximize total utility or profit. It is often referred to as the equimarginal principle or the law of equal marginal utility. The core idea is that a consumer or producer will distribute their resources in such a way that the marginal benefit derived from the last unit of the resource consumed or applied in each use is equal.

For example, a consumer allocating their budget between two goods, apples and bananas, will reach their maximum utility when the marginal utility per dollar spent on apples is equal to the marginal utility per dollar spent on bananas. If the marginal utility per dollar spent on apples is higher, the consumer would increase their satisfaction by buying more apples and fewer bananas. Conversely, if the marginal utility per dollar spent on bananas is higher, they would shift their spending towards bananas. This process continues until the marginal utilities per dollar are equalized, indicating the optimal consumption bundle.

In production, a firm using a resource, such as labor, across different production activities will achieve maximum output or profit when the marginal product of labor per unit of cost is the same in all activities. If the marginal product per dollar spent on labor is higher in one activity than another, the firm would increase its overall output by reallocating labor to the activity where its marginal return is greater, until the marginal returns are equalized across all uses. This principle is fundamental to understanding consumer choice and resource allocation in microeconomics.