Practical Importance of the Law
The Law of SUbstitution, also known as the Law of Equi-Marginal Utility, has a very wide application. It is applicable to the utilisation of time, distribution of assets in various forms and the allocation of resources among various uses. It also applies to the use of money now and its use in the future, i.e., in spending in the present and saving in the future. The law is applicable to all branches of economic theory. II Applies to Consumption. EVery consumer, if he is wise, wants to get maximum satisfaction out of his limited resources. In arranging his expenditure to that end, he must substitute the thing of greater utility for one possessing less utility till marginal utilities are equalized. In this way, the consumer’s satisfaction is maximized. Its Application to Production. To the businessman and the manufacturer the law is of special importance. He works towards the most economical combination of the factors of production employed by him. For this purpose. he will substitute one factor for another till their marginal productivities are made the same. In case he finds that marginal productivity of one actor. say, labour. is greater than that of capital, it will pay him to substitute the Inner for the latter. In this way, he will be able to maximize his profit.
Its Application to Exchange. In all our exchanges. this principle works, for exchange is nothing else but substitution of one thing for another. The substitutional character of our exchange is sufficient to bring home to us the very great importance of this basic economic principle.
Price Determination. This principle has an important bearing on the determination of value. When there is scarcity of a commodity. the Law of Substitution comes to our aid. We start substituting the less scarce goods for Ole more scarce ones. The scarcity of the latter is tl1 relieved. and its price comes down. Its Application to Distribution. In Distribution, we are concerned with the determination of the rewards of the various agents of production, i.e.: determination of rent. wages. interest and profit. These shares arc determined according to the principle of marginal productivity. TIle use of each agent of production is pushed by the entrepreneur tll the margin of profitableness till the marginal product in each case is the slime. In case it is not the same. the Law of Substitution will come into play to equalize heir marginal productivities. 111is is how the Law Of Substitution proves useful in the field of distribution of the national dividend among the various agents of production.