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Current Category » Economics of Natural Resources & Farm Management

Law of Equi Marginal Returns

The law of Equi-marginal returns is concerned with the allocation of the limited amount of resource among different enterprises. The law states that “profits are maximized by using a resource in such a way that the marginal returns from that resource are equal in all cases”

In other words this law suggests that the limited available resources should be invested keeping in view that how much marginal (added) returns we are getting from that enterprise and not how much we are getting average returns. This has been illustrated with the help of following example.
A farmer has Rs.3000 and wants to grow sugarcane, wheat and cotton that are suitable for his farm situation. What amount of money should be spent on each enterprise to obtain highest profit?

Table: Addition to Income from the Marginal (added) amount of Rs.500


Amount of Money Spent

Added Returns (Rs.) from

Sugarcane

Wheat

Cotton

500

800

750

650

1000

700

650

560

1500

650

580

550

2000

640

540

510

2500

630

520

505

3000

605

510

500

Total Returns(Rs.)

4025

3550

3275

Net Profit (Rs.)

1025

550

275

Avg. Returns per Rupee at Rs. 3000

1.34

1.18

1.09

From above table it is found that the investment of Rs.3000 yields maximum average returns from sugarcane enterprise. But if a farmer is investing his amount of Rs. 3000 keeping in view the added returns, the profit he can earn as indicated below.


Stage

Amount of Money Spent on

Added Returns (Rs.) from

1st

500

Sugarcane

800

2nd

500

Wheat

750

3rd

500

Sugarcane

700

4th

500

Cotton

650

5th

500

Sugarcane

650

6th

500

Wheat

650

Total

3000

 

4200

Net Profit

 

 

1200

Thus, investment keeping in view the added return would be.


1st

Rs. 1500

On Sugarcane

Added Returns

Rs. 2150

2nd

Rs. 1000

On Wheat

Added Returns

Rs. 1400

3rd

Rs. 500

On Cotton

Added Returns

Rs. 650

Total

3000

 

 

4200

Thus, the total returns and net profits Rs.4200 and Rs.1200 respectively are greater than the returns and net profit Rs.4025 and Rs.1025 respectively. Hence for maximization of returns resource allocation should be done in view of added returns rather that average returns.

Practical Utility:
This law guides the farmer to plan his budget for the preparation of his cropping scheme. It also provides guidance to the adoption of diversified or specialized farming. It also enables to determine the enterprise relationship complementary or competitive.

Current Category » Economics of Natural Resources & Farm Management