Utility is the amount of satisfaction that you will get from the consumption of a product or service. “It is the economists way of quantifying happiness and as mentioned in a previous post/discussion, this field incorporates ideas from other disciplines like psychology as economists need to understand behaviors, especially those that translate to money (buying, selling, exchange etcetera). (“Economics Principles and Problems”, 2016).
Stemming from game and rational choice theories, utility’s focus is to measure economic choices; it can be determined indirectly with consumer behavior theories, which assume that consumers will strive to maximize their utility, the demand curve is a graphical representation of one of such theories, the law of demand.
Demand curve is a model used to represent the law of demand, this graphical representation shows the figures on a demand schedule (the demand schedule reflects the combination of price and quantity demanded). Hence demand curve is a graph of price and quantity demanded of a unitary product or service.The background assumption here is that when product/good is mentioned, it is a “normal” good as opposed to inferior/giffen or neutral ones whose demand curve would act a tad differently in a similar scenario.
Utility theory can be broken down into,
Total utility: The total satisfaction from a given level of consumption.
Marginal utility: The change in satisfaction from consuming an extra unit
Standard economic theory believes in the idea of diminishing returns i.e. the marginal utility of extra units declines as more is consumed. “Whenever an individual interacts with an economic good, he or she necessarily acts in a way that demonstrates the order in which he or she values the use of that good. Thus, the first unit of a good is dedicated to the individual's most valued end, the second unit is devoted to the second most valued end and so on” (Ross, 2015). Worthy to note, measuring utility upon a fall in price is hinged upon otherwise factors like time, income etcetera being unchanged and constant.
Starting from a position of equilibrium where product A and B are .
MUa/Pa= MUb/Pb
Price of drops of a relative to b
MUa/Pa > MUb/Pb
Hence the consumer can increase total utility by increasing purchase of a, thereby decreasing the marginal utility of a this will continue until MUa/Pa = MUb/Pb once more, so demand curve slopes downwards from left to right in which case utility maximizing condition is fulfilled (Pal, 2016).
The demand curve shows marginal benefits and a willingness to pay for additional amounts of product or service. Since demand has an inverse relationship with price, then as price goes up so does demand down in quantity hence marginal benefits declines as additional units are consumed, because less satisfaction is received from successive unit(s) consumed.
The demand curve previously described is for an individual, an aggregate of individual demands make up the market demand curve, which is a “method of adding amounts along the horizontal axis of a graph; referred to as summing horizontally” (“Principles Of Economics”, 2016).
Do note that there are various reasons for the downward slope of the demand curve, changes in price that cause movement along the curve are called changes in quantity demanded: Substitution effect, quantity demanded increases as price of a good decreases becoming relatively less expensive compared to other goods. Income effect, as price reduces buyers can buy more quantity of a good because there is more left in the income after to purchase; so the consumer’s buying power has increased (“Principles Of Economics”).
Worthy to also note, the substitution effect of a price change alters consumption in a direction opposite to the price change and the income effect reinforces the substitution effect in the case of normal goods; it works in the opposite direction for inferior goods and this is vividly reflected in a demand curve.
Reference
Economics Principles and Problems: Demand and Supply (2016). Economics Lecture. Brigham Young University. Retrieved fromhttps://courses.byui.edu/econ_150/econ_150_old_site/lesson_03.htm
Pal, D. (2016). Demand and Marginal Utility (With Diagram) | Indifference Curve. Retrieved from http://www.economicsdiscussion.net/marginal-utility/demand-and-marginal-utility-with-diagram-indifference-curve/16293
Principles Of Economics: Utility Maximization And Demand. (2016). University of Minnesota Libraries Publishing. Retrieved fromhttps://open.lib.umn.edu/principleseconomics/chapter/7-2-utility-maximization-and-demand/
Ross, S. (2015). What does the Law Of Diminishing Marginal Utility Explain? Retrieved from https://www.investopedia.com/ask/answers/013015/what-does-law-diminishing-marginal-utility-explain.asp#ixzz5FWiMChnG
No comments:
Post a Comment