Marginal utility and the market demand curve

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Utility is the satisfaction derived from consuming a good or service. For example, a person can satisfy his or her hunger by eating a hamburger or a bowl of noodles. In economic theory, the amount of satisfaction or utility derived is expressed in units called utils. This way, comparisons can be made more easily between different goods based on the amount of utility derived. This aids an individual in making consumption decisions including what to buy with the limited income he has and the relative amount much one is willing to pay for different goods. Thus the consumer will pay more for a hamburger worth 3 utils than a bowl of noodles worth 2 utils. The theory or law of diminishing marginal utility (LDMU) states that the marginal utility (MU) of each unit of good consumed will fall as more units are consumed. At this point it is helpful to first define some terms. Marginal utility (MU) is defined as the extra utility derived from each unit of good consumed. Total utility (TU) is the total satisfaction derived from all units of the good consumed. To illustrate the LDMU, take the example of the hamburger. The first hamburger consumed would logically give the consumer the highest satisfaction. When the person eats another hamburger, he may not find it as satisfying as the first one. When he eats the third or fourth hamburger, it may cease to offer any additional satisfaction because he is already full and might now be sick of hamburgers. Thus the fourth hamburger will have a negative MU or what can also be known as marginal disutility. Following this illustration, if we were to draw a graph of MU against units of hamburger consumed, it would be downward sloping, as shown below. The marginal utility curves of each individual would ... ... middle of paper ... ...son may not be the same for another person. Furthermore, satisfaction is subject to various psychological factors that are impossible to quantify. The assumption that consumers are rational utility maximisers is also unrealistic. Consumers influenced by marketing techniques or those ignorant of important information make decisions that do not maximize satisfaction. The theory only applies of the marginal utility of money is constant but in reality, the rich are more extravagant in spending because of the abundance of money they have. Also, the theory fails to explain market demand curves that are upward sloping in the cases of Giffen goods and Veblen goods. There is difficulty in attempting to add up individual marginal utility curves to form the market demand curve because of the above criticisms. The result is likely to deviate from the actual market demand curve.

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