Basic principles of managerial economics - Equi-marginal Principle, Principle of Managerial Economics

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Equi-marginal Principle 

The equi-marginal principle states, that a rational decision maker would allocate or hire his resources in such a way that the ratio of marginal returns and marginal costs of various uses of a given resource is the same, in a given use. For example, a consumer maximizes utility or satisfaction from consumption of successive units of goods X, Y, and Z will allocate his consumption budget such that

MU_x/P_x  = MU_y/P_y = MU_z/P_z

where MU represents marginal utility and P the price of the good. Similarly, a producer seeking maximum profit will use the technique of production which would ensure that 

MRP₁ / MC₁ = MRP₂/MC₂ = MRP_n/MC_n

where MRP is the marginal revenue product of inputs and MC shows marginal cost. 

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