Tiêu đề Micro Important A2.pdf ✅

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Utility and Indifference come analySis
Q5. Assess the extent to which the law of diminishing marginal utility provides an explanation of the normal downward sloping demand curve. [20] OR Q6. Explain the theoretical link between utility price and demand and assess whether this theory has any practical relevance. [20] Process The economist Alfred Marshal introduced the utility theory, in order to explain how the demand curve for a good may be derived, this theory is also called the cardinalist approach, as it uses a numerical method, where it uses utility, i.e., the satisfaction derived from consuming a good. In this theory it is assumed that all consumers are rational, i.e., they aim to maximize their satisfaction. Thus, they want to maximize their total utility, this is the total satisfaction gathered by consuming all units, of a good, and this is maximized when the marginal utility, i.e., the additional satisfaction derived by consuming a good, is zero. Moreover, it is also assumed that consumer behaviour is consistent, because uncertainty in behaviour will make the formation of the theory difficult. It is also assumed that the income of the consumer is fixed, and the marginal utility of money is constant. The diagram 1, below shows the relation between total utility, and marginal utility where, as the consumer consecutively consumes the good, this causes the marginal utility derived to fall, this is called the law of diminishing marginal utility. As the marginal utility falls, the total utility increase, and it is maximum at 4 units, where marginal utility is zero. After this any further consumption of the good will result in a fall in total utility, and a negative marginal utility. Asimple model of this theory is the single commodity equilibrium. Aconsumer purchasing a single commodity will be at equilibrium when he buys the commodity in such a quantity that gives him maximum satisfaction. Besides, the two factors which affect the number of units of the given commodity to be consumed are the Price of the given commodity and the Marginal Utility from each successive unit. In order to determine the equilibrium point, the consumer compares the price of the given commodity with the satisfaction level derived from it (utility). Being a rational consumer, he will be at an equilibrium level when the price paid for the commodity is equal to marginal utility, i.e. �� = �����. DA PAGE 22