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Microeconomics 1110 ch 6.docx

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ECON 1110

Microeconomics 1110 Ch. 6 The theory of consumer choice can be used to provide a theoretical underpinning to the belief that a demand schedule slopes downwards. Additionally you will gain an understanding to: marginal analysis The history behind this is as follows: basically, ppl are concerned about the relationship btwn price and value. They were suppose to be linked. There were some concerns, however, one such concern was the famous Diamond and Water paradox. This riddle posed the question: water is a good we value very highly but its price is low. We don’t need diamonds to survive but their price is very high. So why is water cheap and diamonds pricey? Relative scarcity is resp. for this price difference however, the question asks why price and value negatively correlate. Marginal analysis helps us solve the paradox Theory of marginal and total utility analysis begins by assuming  more is preferred to less  satisfaction, or utility, can be measured in cardinal terms, using #s (utils)  increasing consumption of a good adds to TU, but every extra unit of the good consumed gives increasingly smaller amounts of utility. An extra unit is termed “marginal unit: and it is assumed that MU is declining as more units of good are being consumed Diminishing Marginal Utility With every additional consumer of a good, MU is decreasing and TU is increasing.. eventually MU will be zero and consumption will stop b/c every additional unit will cause less satisfaction Price is related to MU, not TU and the diamond/water paradox is thus solved. Water is relatively more
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