ECO100Y5 Chapter Notes -Marginal Utility, Robert Giffen, Demand Curve
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ECO100Y5 Full Course Notes
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There are three theories of demand or there are three theories of measuring demand: Theory of demand (a) marginal utility analysis; (b) indifference curve techniques; and (c) revealed preference theory. Basic assumptions: (i) cardinal measurement of utility, (ii) utilities are independent, (iii) constant marginal utility of money, (iv) introspection drawing reference about a person from one"s own experience. (a) law of diminishing marginal utility: It refers to the additional benefit, which a persons derives from a given increase of his stock, diminishes with every increase in his stock. Characteristics: (i) the marginal utility diminishes which every increase in stock, (ii) the total utility is maximum when the marginal utility is zero, (iii) each particular want is stable, (iv) goods are imperfect substitutes and consumed in appropriate portions. It refers to the addition in total utility resulting from a one-unit change in the quantity consumed.
