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Leaving Cert: Law of equimarginal returns

  • 14-06-2009 1:02pm
    #1
    Liam O
    Registered Users, Registered Users 2 Posts: 19,434 ✭✭✭✭


    ok so when a teacher came in to give our class tips she said don't go in with knowing the law of equimarginal returns. I want to know if this is just the same/ very similar to the law of marginal returns. This probably looks like a stupid question but it's been bugging me for a while now.


Comments

  • #2
    Time Magazine
    Registered Users, Registered Users 2 Posts: 8,452 ✭✭✭Time Magazine


    Liam O wrote: »
    ok so when a teacher came in to give our class tips she said don't go in with knowing the law of equimarginal returns. I want to know if this is just the same/ very similar to the law of marginal returns. This probably looks like a stupid question but it's been bugging me for a while now.

    You're getting confused between the law of diminishing marginal returns (which is where you enjoy your second Mars bar less than your first) and the law of equi-marginal returns, which is also really easy and I'll explain now.

    Say you eat apples and oranges and you've €10 left to spend. Say your marginal utility of apples is currently greater than the MU of oranges. You're going to buy an apple because it's more appealing/gives you a higher utility. And you're going to continue to buy apples instead of oranges while apples are more appealing. But each apple gives you less marginal utility, so eventually you'll want an orange just as much as you want an apple and then you're indifferent. In this case, the marginal utility of an apple is the same as the marginal utility of an orange: the law of equi-marginal returns.

    The law of equi-marginal returns: people purchase quantities of goods until the marginal utilities of them equal each other.


  • #3
    Économiste Monétaire
    Closed Accounts Posts: 2,208 ✭✭✭Économiste Monétaire


    Remember the MUx/Px = MUy/Py (The marginal utility of good X over the price of good X should be equal to the marginal utility of good Y over the price of good Y) idea? It's an extension of the concept of marginal returns, you consume goods in a pattern that maximises your overall utility (giving the highest utility per Euro possible from a given budget).


  • #4
    Liam O
    Registered Users, Registered Users 2 Posts: 19,434 ✭✭✭✭Liam O


    Thanks, reckon I've got it now, hopefully will get me 16 marks :)


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