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Lecture 6

ECONO-2202 Lecture Notes - Lecture 6: Demand Curve, Budget Constraint


Department
Economics
Course Code
ECONO-2202
Professor
Iqbal
Lecture
6

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Notes on Utility Theory:
Utility refers to the amount of satisfaction a person gets from consumption of a certain
item.and marginal utility refers to the addition made to total utility, we get after consuming one
more unit.
Law of Diminishing Marginal Utility
An individual's wants are unlimited in number yet each individual's want is satiable. Because of
this, the more we have a commodity, the less we want to have more of it.
This law state that as the amount consumed of a commodity increases, the utility derived by the
consumer from the additional units, i.e marginal utility goes on decreasing.
The law of diminishing marginal utility explains the downward sloping demand
curve
Definition
According to Marshall, “The additional benefit a person derives from a given increase of his
stock of a thing diminishes with every increase in the stock that he already has”
Assumptions:
All the units of a commodity must be same in all respects
The unit of the good must be standard
There should be no change in taste during the process of consumption
There must be continuity in consumption
There should be no change in the price of the substitute goods
Explanation:
As more and more quantity of a commodity is consumed, the intensity if desire decreases and
also the utility derived from the additional unit.
Suppose a person eats Bread. and 1st unit of bread gives him maximum satisfaction. When he
will ead 2nd bread his total satisfaction would increase. But the utility added by 2nd bread(MU)
is less then the 1st bread. His Total utility and marginal utility can be put in the form of a
following schedule.

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Plotting the above data on a graph gives
Here, from the MU curve we can see that MU is declinig as consumer consumes more of
the commodity.
When TU is maximum, MU is Zero.
After that, TU starts declining and MU becomes negative.
Exceptions:
Money
Hobbies and Rare Things
Liquor and Music
Things of Display
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