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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?

 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.