Demand analysis

LAW OF DIMINISHING MARGINAL UTILITY

AND

LAW OF EQUI MARGINAL UTILITY

UTILITY

Characteristics:

• Utility is subjective/not measurable• Utility is variable• Utility is different from usefulness• No legal or moral connotations

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.

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

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

Lawof

Diminishing Marginal Utility

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

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.

All the units of a commodity must be same in all respects. The unit of the good must be standardThere should be no change in taste during the process of consumptionThere must be continuity in consumptionThere should be no change in the price of the substitute goods

ASSUMPTIONS

EXCEPTIONS

# Money

# Hobbies and Rare Things

# Liquor and Music

# Things of Display

IMPORTANCE

• Basis of Law of Demand

• Basis of Consumption Expenditure

• The basis of Progressive Taxation

Lawof

Equi-MarginalUtility

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.

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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