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64 p a g e microeconomics 101 some economists have

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64 |P a g e(Microeconomics- 101)Some economists have suggested that utility can be measured in monetary units, by theamount of money the consumer is willing to sacrifice for another unit of a commodity.Others suggested the measurement of utility in subjective units, calledutils(Walras hasintroduced).The main cardinal theories are law of diminishing marginal utility (Gossen’s first law);and the law of equi-marginal utility (Gossen’s second law).Ordinal Approach:Theordinalist schoolpostulated that utility is not measurable, but is an ordinal magnitude.The consumer can giverankthe various baskets of goods according to the satisfaction thateach bundle gives him. He must be able to determine hisorder of preferenceamong thedifferent bundles of goods.The main economists of ordinal approach are Pareto, W. E. Johnson, E. E. Slutsky, J. R.Hicks and R.G.D. Allen.The main ordinal theories are theindifference curves approachand therevealed preferencehypothesis.The Cardinal Utility ApproachAssumptions:Rationality;Cardinal utility;Constant marginal utility of money; andDiminishing marginal utility.Laws of Cardinal Marginal Utility Analysis:1.Law of Diminishing MarginalUtility (Gossen’s First Law);and2.Principle of Equi-Marginal Utility (Gossen’s Second Law).
65 |P a g e(Microeconomics- 101)Law of Diminishing Marginal Utility:The Law of diminishing marginal utility states that as the consumer consumes more of acommodity, the utility of every additional unit (MU) consumed diminishes.Assumptions:Commodities are homogeneous;There is no gap between consumption of different units;Every consumer wants to maximize utility;The taste and preferences of the consumer are remains the same during theperiod of the consumption;Marginal utility of money remains the same.Principle of Equi- Marginal Utility (Consumer Equilibrium):The principle of equi- marginal utility states that the consumer will distribute his money incomein such a way that the utility derived from the lastSaudi Riyalspent on each good is equal.In otherwordsthe consumer is in equilibrium position when marginal utility of money spent on each goodis same.Equilibrium of the Consumer:In case of Single Commodity:Under the condition ofsingle commodity (x)the consumeris in equilibrium when the marginal utility of good x is equal to price of x. That is,MUx= PxIf MUx> Px; the consumer can increase his welfare or satisfaction by purchasing more units of x.
66 |P a g e(Microeconomics- 101)If MUx< Px; the consumer can increase his total satisfaction by cutting down the quantity of x.In case of More Commodity:If there aremore commodities, the condition for equilibriumof the consumer is the equality of the ratios of the marginal utilities of the individualcommodities to their prices. That is,Where λ denotes the marginal utility of the last riyal spent on each good.

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