ABSTRACT

Surprised that the Equi-marginal Principle is back? You shouldn’t be. The theory of choice in Part 1 was designed to apply regardless of what is being chosen. We have already seen how consumers were modelled as boxes which digest commodities (or, more generally, experiences) as inputs and produce utility as output. If we think of these boxes as firms then the inputs are the ‘commodities’ used during the production process (e.g. labour, land, machines, raw materials) and the output is the commodities that come out of the production line (Figure 5.1). So, in exactly the same way that the Equi-marginal Principle relates how the first box (i.e. the consumer) can get the most output (i.e. utility) out of the inputs (e.g. commodities), it can also explain how the second box (i.e. the firm) can get the most output (i.e. commodities) out of its inputs (e.g. land, labour, machines).