This website uses cookies to ensure you have the best experience. Learn more

Marginal Utility And The Market Demand Curve

1013 words - 5 pages

Utility is the satisfaction derived from consuming a good or service. For example, a person can satisfy his or her hunger by eating a hamburger or a bowl of noodles. In economic theory, the amount of satisfaction or utility derived is expressed in units called utils. This way, comparisons can be made more easily between different goods based on the amount of utility derived. This aids an individual in making consumption decisions including what to buy with the limited income he has and the relative amount much one is willing to pay for different goods. Thus the consumer will pay more for a hamburger worth 3 utils than a bowl of noodles worth 2 utils.

The theory or law of diminishing ...view middle of the document...

Two, consumers have limited incomes.

Based on this theory and its assumptions, consumers would buy a good until where price (P) equals MU. The price one is prepared to pay is the value he or she places on the good. When price charged (P) is below MU, the consumer is prepared to pay more than he is charged and thus can increase total utility by increasing consumption of the good. When P is above MU, the consumer is prepared to pay lesser than he is charged for the good and can increase total utility by decreasing consumption of the good. In other words, a rational consumer will only be prepared to buy a good as long as the marginal benefits (marginal utility) he gains are higher than the marginal costs (price charged) of the good. To sum it up, the equilibrium level of consumption is where consumer utility is maximized that is where P = MU.

This analysis thus demonstrates that an individual’s demand curve is the same as the individual’s marginal utility curve, where utility is measured in money. When the price charged is lower, the marginal cost of the good to the individual is lower and the rational will buy more of the good at the lower price than at a higher price.

The equi-marginal principle also demonstrates this to be true. It states that a combination of goods gives a consumer maximum utility when the ratio of the MU is equal to the ratio of the prices (□(MUa/MUb)=□(Pa/Pb)). This means that the MU per unit price is the same for, say, good A and good B (□(MUa/Pa)=□(MUb/Pb)).

To illustrate this concept suppose the last unit of good A consumed gave as much utility as the last unit of good B consumed (□(MUa/MUb)=1) but good A costs twice as much as good B (□(Pa/Pb)=2). The rational consumer will buy less of good A and more of good B. According to the LDMU, MUA will rise and MUB will fall. The ratio □(MUa/MUb) will rise. To maximse...

Find Another Essay On Marginal utility and the market demand curve

Supply and Demand in UK Housing Market

2765 words - 11 pages itself. This work will analyse the different factors that affect demand and supply when buying a house in London.The diverse population of London leads to a wide range of types of housing being available: houses, flats, bungalows, maisonettes among some others, having the majority of its housing market as a second hand one.This reports will make a detail analysis of the London housing market, focusing on the main factors that affect the supply and

Explain why supply and demand curves shift and how shifts cause changes in the market price

1900 words - 8 pages supply and demand curve for a certain good or service. This occurs when there is perfect competition in a perfectly competitive market. This is where the market is large enough so that no one individual firm or individual has any appreciable influence on the price of the commodity. In monopolistic or oligopolistic competition this may not be the case, and the price of the good may be determined largely through the actions of one or several

The extended AD-AS model and the Phillip's curve

1330 words - 5 pages leftward, as from AS1 to AS2 . If govt. counters the decline in real output by increasing agg. demand to the broken tine, the price level rises even more. That is, the economy moves in steps from a to b to c. In contrast if the govt. allows a recession to occur, nominal wages, eventually fall and the agg. Supply curve shifts back rightward to its original location. The economy moves from a to b and then eventually back to a.The inflation

Market Demand and Potential of Gerber Baby Foods

659 words - 3 pages , however, for Gerber to market their full range of products early enough to create such a loyalty.According to a study conducted by the Agri-Food Trade Services, sales of Organic based foods have increased yearly over 20%. In 2003, the total organic food sales were estimated to be worth nearly $9 billion, and on April 21, 2001, the Appropriate Technology Transfer for Rural Areas (ATTRA) enacted a law entitled the National Organic Program that now

Housing Market in Demand and Supply - University of Auckland - Essay

365 words - 2 pages community. Resisdent are encourgaer to grow plants and food at the own tarrance roof and share living area. selling the food at the level market space. Tradition housing level Free standing house, ground floor and third floor with living, middle floor as share living and dining, social garden. Idea of could cater a big family type. Youth and the bottom and while the Oldies at the top level, mixing communication at the center level.

Clinical Utility of the FFM and DSM-IV in the Diagnostic and Treatment of Personality Disorders

1125 words - 5 pages categorical model for a dimensional model. There are studies that support this change, however the opponents to the change argue that does not have clinical utility (First, 2005) currently the categorical model and the FFM are under active investigation, comparing the clinical utility of both models. (Lowe & Widiger, 2009). Rottman and colleagues conduct a study in which clinicians have to identify the DSM-IV personality disorders in the basis of an

Supply and Demand Factors for the Live Beef Cattle Export Market and the effect of the 2011 Ban of Live Beef Cattle Exports to Indonesia

3693 words - 15 pages 1 Supply and Demand Factors for the Live Beef Cattle Export Market and the effect of the 2011 Ban of Live Beef Cattle Exports to Indonesia University of Western Australia Masters of Business Administration ECON5503 Economic Management and Strategy Trimester 3, 2013 2 Introduction Australia is the world's largest beef and live cattle exporter. Apart from accelerating global demand for beef offering a significant opportunity to the Australian

Bentham’s Principle of Utility and its Shortcomings as the Sole Basis for Morality

2018 words - 8 pages ” (Bentham pg. 312). Bentham believes that we need to create a society in which there is a balance of both self and other regarding behavior, in order to create a society that maximizes happiness while minimizing pain. Bentham introduces the principle of utility as a basis for morality as its concern is maximizing utility for the group. He also asserts that all other principles are not apt as the basis for morality for different reasons. He sees the

The Concepts of Supply and Demand

1365 words - 5 pages additional fuel to power their economic recoveries. Of course, tight gasoline market conditions often lead to calls for industry investigations. State and federal investigations of gasoline prices - numbering 29 over the last several decades - have found no wrongdoing or illegal activity and concluded that supply and demand market forces were responsible. As we think back through the factors that have affected capacity, we are left with much

Supply and demand for the pors

704 words - 3 pages a hungry target market; also giving away free test-drives throughout Europe.The Boxter's price was its main advantage. It was said that by pricing the car exactly right Porsche executives had cornerstoned the market. The Boxter S was cunningly underpriced, so that when it was actually purchased, it would rise in value. Thus the demand for these cars was massive, and due to the waiting list, people tried to buy second hand, from Porsches own

What is meant by the derived demand for labour why is the labour market regarded as a factor market?

766 words - 3 pages Labour is the human element in the production process. It is the intellectual and physical effort of people in production. The labour market is a factor market where the demand and supply of labour interact to determine the wage rate and the allocation of labour resources in the economy.The demand for labour is derived form the demand for the goods and services that labour is used to produce. The demand for labour is influenced by the level of

Similar Essays

Comparing The Utility Of Bentham And Mill

2032 words - 8 pages Comparing the Utility of Bentham and Mill utility \U*til"i*ty\, n. [OE. utilite, F. utilit['e], L. utilitas, fr. utilis useful. See Utile.] … 3. Happiness; the greatest good, or happiness, of the greatest number, -- the foundation of utilitarianism. --J. S. Mill. Syn: Usefulness; advantageous; benefit; profit; avail; service. (www.dictionary.com) One of the major players in ethical theories has long been the concept of

The Morality And Utility Of Artificial Intelligence

4503 words - 18 pages The Morality and Utility of Artificial Intelligence Douglas R. Hofstadter, in his work Gödel, Escher, Bach: An Eternal Golden Braid, remarks that one may contend that Artificial Intelligence is born of a machine’s ability to perform any task that had been previously confined to the domain of humans (601). However, a few sentences later, the author explains Tessler’s “Theorem” of progress in AI: “once some mental function is programmed

Evaluate The Market Mechanism: Demand And Supply Relate To Food Market In The United Kingdom

1439 words - 6 pages In General, demand, supply and price are the major components of the economy in both competitive and non-competitive markets. Exchanging goods is occurring everyday and everywhere in the world so in order to maximise profit and the use of resources, companies have to know approximately the quantity of goods that customers require. This short essay will discuss the market mechanism in general and particular in food market in the United Kingdom

Why Is The Demand Curve Of A Firm In Perfect Competition Perfectly Elastic?

1420 words - 6 pages five basic assumptions. These assumptions stay the same regardless the fact whether the market under consideration is a product market or a factor market. The first four have to do with the supply side and the fifth assumption is concerned with the demand side. As outlined below the first assumption states that all firms in perfect competition are price taking firms.What is a price-taking firm? A firm is both a supplier and a demander; it is a