Page 43 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes that the marginal factor of each factor is equal. A producer must go on substituting various factors
until marginal productivity of each factor is equal. A producer can succeed in his aim of getting
maximum satisfaction only when he adjusts his limited resources.
3. Exchange: Exchange means replacement of goods giving less utility with goods giving more utility.
Acting upon the law every person will go on substituting goods giving more utility for the ones
giving less utility, till the marginal utility of all becomes equal. Exchange will stop at this point.
Money should be also exchanged for other goods and services up to the mark where the marginal
utilities of the goods or the services are equal to the marginal utility of the money to be spent on
them.
4. Distribution: It refers to the distribution of national income among the factors of production that
are land labour, capital etc. it is done in such a way that in the long run every factor gets share out
of national income according to its marginal utility. In order to have such distribution factors are
to be mutually replaced in a manner that the marginal productivity of each factor is equal to its
remuneration, and the marginal productivity of the different factors becomes equal to each other.
5. Public Finance: The law also has importance in this sphere of public finance, that revenue and
expenditure of the state. At the time of levying taxes finance minister takes its help. He levies the
tax in such a way that the marginal sacrifice of each tax payer is equal. Then only it has least burden
on the tax payers. In order to achieve this objective a finance minister may substitute one tax for
others. Similarly, at the time of spending public fund it is ensured that the marginal benefit of each
type of expenditure should be equal. When the marginal social sacrifice made by the people in the
form of payment of the taxes is equal to the marginal social benefit derived by them out of the public
expenditure, then the country can enjoy maximum social advantage.
6. Distribution of income between saving and consumption: According to this law, income should
be distributed between consumption and saving that the last unit of money spent on present
consumption should yield the same utility as the last unit of money kept in the form of saving. Such
a distribution is called optimum allocation.

7. Optimum distribution of commodities: Optimum distribution of the commodities is possible with
this law in a free market economy. Optimum distribution of commodities refers to that distribution,
a slight change whereof may diminish the total utility enjoyed by society as a whole. Optimum
distribution becomes possible when a commodity is distributed among different persons in such
a way that marginal utility derived from each person becomes equal.
8. Distribution of assets: Distribution of assets helps people distribute their assets in different forms.
Suppose a person has cash of 1 lakh . He wants to invest in different forms bank deposit, bond, stock
shares, housing etc. According to this law, investment should be made in different, forms of assets
in such a way that last unit of money invested in each form should yield equal marginal utility.
Thus he will derive almost equal psychological benefit from all forms of assets and thereby enjoys
maximum satisfaction.

Give your opinion on importance of the law.

3.12 Criticisms of the Law

1. Consumers are not Fully Rational: The assumption that consumers are not fully rational is not correct.
Some consumers are idle by nature, and so to satisfy their habits and customs, they sometimes buy
goods yielding less utility. Eventually, they do not get maximum satisfaction.

36 LOVELY PROFESSIONAL UNIVERSITY