Law of diminishing marginal
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This document discusses the economic concept of diminishing marginal utility. It defines utility as satisfaction from consuming a good, and marginal utility as the change in utility from consuming an additional unit of a good. The law of diminishing marginal utility states that the marginal utility of a good declines as consumption increases. Total utility still increases if marginal utility remains positive. The document uses an example of consuming slices of pizza to illustrate total and marginal utility. It also discusses the diamond-water paradox and how value in use differs from value in exchange.
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- Similarly, marginal utility for other quantities is
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The document discusses key concepts in consumption including utility, marginal utility, total utility, the law of diminishing utility, and the law of equi-marginal utility. It explains that utility refers to the satisfaction derived from consuming a good and that marginal utility diminishes with increasing consumption of a good. The law of equi-marginal utility states that rational consumers will allocate their budget in such a way that the marginal utility per unit of expenditure is equal across all goods consumed. The document also notes criticisms of these laws given the subjective nature of utility.
Theory of utitltiy
This document discusses theories of utility, including that utility is the satisfaction derived from consumption and possession of goods. It defines total utility, marginal utility, and the law of diminishing marginal utility. As consumption of a good increases, the marginal utility of each additional unit decreases. The relationship between total utility and marginal utility is explained, with total utility rising as marginal utility diminishes, reaching zero when total utility is maximum. Exceptions to the law of diminishing marginal utility are provided. The law of equi-marginal utility states that a consumer will allocate income so that the marginal utility per rupee spent is equal across goods.
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Utility theory proposes that consumers aim to maximize their total utility, or satisfaction, given budget constraints. There are two main approaches to measuring utility - cardinal and ordinal. The cardinal approach assumes utility can be quantitatively measured, while the ordinal approach only requires consumers can rank their preferences. Consumer equilibrium is reached when the marginal utility per dollar spent is equal across all goods purchased. Prices reflect marginal utility rather than total utility, explaining why essential goods like water are cheap despite high total utility, while luxury goods like diamonds are expensive due to low availability increasing marginal utility. Utility theory provides a framework for understanding consumer choice.
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The document discusses the difference between the prices of diamonds and water by explaining the concepts of total utility and marginal utility. While water is essential for life, its marginal utility is low since it is plentiful. Diamonds, which are less essential, have a higher marginal utility because they are scarcer. The key difference is the law of diminishing marginal utility - as consumption of a good increases, the additional utility from each unit decreases. The document then discusses other economic concepts like supply and demand curves, opportunity costs, sunk costs and more.
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Bab5 theory of consumer behavior
This document discusses consumer behavior theory and the two approaches to understanding consumer utility - the cardinal and ordinal approaches. It explains key concepts like total utility, marginal utility, indifference curves, and the conditions for consumer equilibrium. The cardinal approach uses measurements of utility to analyze concepts like diminishing marginal utility and the law of equi-marginal utility. The ordinal approach uses indifference curves and budget constraints to show consumer equilibrium without measuring exact utility amounts.
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Law of diminishing marginal
- 1. Dr. C.V. Suresh Babu of Diminishing Marginal Utility
- 2. • In economics, utility is the satisfaction or benefit derived by consuming a product; thus the marginal utility of a good or service is the change in the utility from an increase in the consumption of that good or service.
- 3. tility as an additional unit
- 4. Utility • Utility = level of happiness or satisfaction associated with alternative choices • utility maximization
- 5. Total and marginal utility • total utility - the level of happiness derived from consuming the good • marginal utility - the additional utility that is received when an additional unit of a good is consumed
- 6. Marginal utility 0 0 1 70 2 110 3 130 4 140 5 145 6 140 - 70 40 20 10 5 -5 # of slices of pizza total utility marginal utility
- 8. Law of diminishing MU • law of diminishing marginal utility - marginal utility declines as more of a particular good is consumed in a given time period, ceteris paribus • even though marginal utility declines, total utility still increases as long as marginal utility is positive. Total utility will decline only if marginal utility is negative
- 9. Diamond-water paradox • As noted by Adam Smith, water is essential for life and has a low market price (often a price of zero) while diamonds are not as essential yet have a very high market price. • Smith’s explanation: “value in use” vs. “value in exchange” • value in exchange: labor theory of value
- 11. Value in use and value in exchange • value in use = total utility • value in exchange is related to marginal utility
- 12. Consumer equilibrium 1. 2. All income is spent. The first condition listed above is sometimes referred to as the "equimarginal principle."
- 13. Consumer equilibrium and demand • Suppose that the price of good X rises. • Two effects: • substitution effect • income effect
- 14. Consumer surplus • Individuals buy an item only if they receive a net gain from the purchase (i.e., total benefit exceeds opportunity cost. • This net gain is called “consumer surplus.”
- 15. Example • Suppose that an individual buys 10 units of a good when the price is $5
- 16. Benefits and cost of first unit • Benefit = blue + green rectangles (=$9) • Cost = green rectangle (=$5) • Consumer surplus = blue rectangle (=$4)
- 17. Total benefit to consumer
- 18. Total cost to consumer
- 19. Consumer surplus