Utility, Indifference curve, Budget line Theory of Consump tion ALLPPT.com _ Free PowerPoint Templates, Diagrams and Charts • Michael Parker • H.L. Ahuja • Mohammad Saiful Islam
Utility Utility refers to the satisfaction. In economics, it is a r epresentation of preferences over some set of goods and services. Given an income and the market prices of various goods, a rational consumer wants to obtain highest possible utility or satisfaction. In order to do s o, consumer must be able to compare utility of variou s baskets of goods, which he can buy with his incom e. Two approaches have been identified to the problem of comparison of utilities- 1. The cardinalist Approach 2. The ordinalist Approach.
Cardinal Utility Analysis
Law of Diminishing Marginal Utility Assumptions 1. Cardinal measurement of utility. 2. The hypothesis of independent utilities 3. Constancy of the marginal utility of money This law states that, the amount of extra or marginal utility declines as a person consumes more and more of a good. Utility tends to increase as we consume more of a good. However, according to the law of diminishing MU, as we consume more and more our total utility will increase but at a decreasing rate.
Law of Diminishing Marginal Utility
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