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Law Of Diminishing Marginal Utility - Coggle Diagram
Law Of Diminishing Marginal Utility
What is ?
With repeated consumption of an identical product ,the additional satisfaction received keeps on decreasing.
As you add variable resources to fixed resources the additional output will eventually decrease
For eg: You increase the number of labourers but the number of resources they use remain the same ,so the output will eventually start decreasin
Marginal Utility Formula=Change In Additional Product/Change In Resources
when should you stop consuming?
At the point when it is not adding any value to my sense of well being nor affecting my sense of being negatively
Stop when marginal utility becomes zero
MU becomes zero at 4.5
Consumer Equilibrium
For a consumer ,highest satisfaction is achieved when the price is not that high and is happy with consuming the product
That means both the added satisfaction ie marginal utility and price needs to be considered which marginal utility per dollar.
How is it achieved?
When MU per last dollar spent is equal across all good and all income has been spent
MU/dollar of K product is more ,consume more of K and less of others
MU/dollar of W product is less ,consume less of W and more of others
Indifference Curve
To calculate marginal utility in order to understand consumer's buying choices is cumbersome
Indifference curve makes it easier to analyse price, ,consumer's preferences and choices.
Assumptions
Consumers can rank their preferences
Consumer preferences are transitive
Consumer preferences are logically consistent
Eg:If a person likes vanilla more than chocolate and chocolate more than strawberry ,then given strawberry and chocolate he will like chocolate more
Marginal Utility never falls below zero
Indifference curve lists out all the possible combinations of choices
Budget will act as a constraint stopping the curve from rising higher
IndiffernceCurve And Constraints
Budget Constraint
Desire And Ability To Consume
Equilibrium Point
Equilibrium Gives The Highest Utility Satisfaction
Budget Goes Up And Down
Burger Price Goes Up and Down
Even though it is the burger price that goes up ,the equilibrium price for CD also goes down
The Buying Capacity for CD's also goes down
CD Price goes up and goes down
