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Demand analysis

  1. 1. LAW OF DIMINISHING MARGINAL UTILITY AND LAW OF EQUI MARGINAL UTILITY
  2. 2. UTILITY Characteristics: • Utility is subjective/not measurable • Utility is variable • Utility is different from usefulness • No legal or moral connotations
  3. 3. Marginal Utility (MU) The word Marginal means “Border” or “Edge”. It is the addition made to the total utility by consuming one more unit of a commodity.
  4. 4. Total utility (TU) Total Utility refers to the total satisfaction derived by the consumer from the consumption of a given quantity of a good. TU = Sum of all MU
  5. 5. The exponents of the utility analysis have developed two laws which occupy a very important place in economics theory and they are :- # Law of Diminishing Marginal Utility # Law of Equi-Marginal Utility Exponents
  6. 6. Law of Diminishing Marginal Utility
  7. 7. This law state that as the amount consumed of a commodity increases, the utility derived by the consumer from the additional units, i.e marginal utility goes on decreasing. According to Marshall, “The additional benefit a person derives from a given increase of his stock of a thing diminishes with every increase in the stock that he already has” STATEMENT
  8. 8. EXPLANATION As more and more quantity of a commodity is consumed, the intensity if desire decreases and also the utility derived from the additional unit.
  9. 9. All the units of a commodity must be same in all respects. The unit of the good must be standard There should be no change in taste during the process of consumption There must be continuity in consumption There should be no change in the price of the substitute goods ASSUMPTIONS
  10. 10. EXCEPTIONS # Money # Hobbies and Rare Things # Liquor and Music # Things of Display
  11. 11. IMPORTANCE • Basis of Law of Demand • Basis of Consumption Expenditure • The basis of Progressive Taxation
  12. 12. Law of Equi-Marginal Utility
  13. 13. STATEMENT This law states that the consumer maximizing his total utility will allocate his income among various commodities in such a way that his marginal utility of the last rupee spent on each commodity is equal. The consumer will spend his money income on different goods in such a way that marginal utility of each good is proportional to its price.
  14. 14. Limitations ##It is difficult for the consumer to know the marginal utilities from different commodities because utility cannot be measured. #Consumer are ignorant and therefore are not in a position to arrive at an equilibrium. #It does not apply to indivisible and inexpensive commodity.
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