from marninal utility,law of diminishing returns,the isoquant vurves,the flow of circular diagram and illustrations of the LM-SCHEDULE

Answer 1
The satisfaction a consumer gets by having or consuming goods or service called utility by economists.
There are different opinions about how utility can be measured in order to estimate the demand for
the product. The two most important divisions for measuring utility are cardinal utility analysis & ordinal
utility analysis. According to cardinal school utility id quantifiable in units whereas the ordinal school
posts that it cannot be measured but can be shown as higher than or less than the other ranks.
Total utility in this context refers to the sum total of utility levels out of each unit of a commodity
consumed within a given period of time. Thus if a consumer has three apples, his/her total utility the
sum of the utility derived out of each apple. Marginal utility is the change in total utility due to a unit
change in the commodity consumed within a given period of time. In other words, marginal utility is the
total utility of the additional or nth unit consumed of the commodity. In other words,
MU = TUn-TU n-1
Using calculus we may express marginal utility as:
MU = dTU/dQ
An important tenet of cardinal utility analysis relates to the behavior of marginal utility. This
familiar behavior of marginal utility as been stated in the Law of Diminishing Marginal utility or
the marginal utility theory according to which marginal utility of a good diminishes as an
individual consumes more units of a good. In other words, as a consumer takes more units of
good, the extra utility or satisfaction that he derives from an extra unit of a good goes on
falling.
Marshall who was famous exponent of the cardinal utility analysis has stated the law of
diminishing marginal utility as follows:
“The additional benefit which a person derives from a given increase of his stock of thing
diminishes with every increase in the stock that he already has.”
The law is based upon two important facts:
1. While the total wants of a man are unlimited each single want is satiable. Therefore as
an individual consumes more & more units of a good, intensity of his want for the good
goes on falling & a point is reached where the individual no longer wants any more units
of the good. At this point Marginal Utility of the good becomes zero.
2. Law of diminishing marginal utility is based on the premise that the different goods are
not perfect substitutes for each other in the satisfaction of various particular wants.
When a consumer consumes for each other in the satisfaction of various particular
wants more of one good the intensity of his particular want for the good diminishes.
Illustration of the Law of Diminishing marginal utility
The following table presents the total and marginal utilities derived by a person by
consumption of cups of tea consumed in a day.
When one cup is taken the total utility derived by the person is 12 utils. With the
consumption of 2nd cup per day, the total utility rises to 22 utils but marginal utility falls to
10. As can be seen the total utility rises upto 6 cups of tea even though the marginal utility
keeps on diminishing. The seventh cup of tea instead of giving positive marginal utility gives
negative marginal utility equal to -2. Thus an extra cup of tea beyond six units gives disutility
to the individual rather than positive satisfaction.
The above table has been graphically represented as given below. The total utility curve first
increases with increase in number of units, becomes maximum & the declines. The Marginal
utility keeps on decreasing but is positive as long as total utility is increasing. Once marginal
utility becomes negative the total utility starts declining. This downward sloping marginal
utility curve has an important implication for consumer behavior reading the demand of the
goods.
Tea cups consumed Total utility Marginal utility
1 12 12
2 22 10
3 30 8
4 36 6
5 40 4
6 41 1
7 39 -2
8 34 -5
The above law is based on various assumptions like:
1. The Unit of consumption must be standard one i.e. too large or too small units
would not validate this law.
2. Consumption must be continuous. Gaps between consumption would not validate
this law.
3. The demand for the goods should be recu
ing in nature.
4. Taste & preference of the consumer should remain unchanged during the course pf
consumption.
5. The goods should be normal & not addictive in nature.
6. Marginal utility of money to remain constant.
The consumer equili
ium can be obtained using the marginal utility analysis at the point where
the Price of the good equals the marginal utility derived form the good. In case marginal utility
id more than the price the consumer would consume more of & if Marginal utility is less than
the price the consumer would reduce the consumption of the good. Therefore equili
ium is
when,
MUx=Px
Choosing between different goods:
If a consumer has to buy multiple goods at the same time we use the law of equi marginal utility to
determine the units of different commodities to be consumed. This law states that a consumer will...