Marginal utility approach, Managerial Economics

Marginal utility approach

The downward sloping nature of the demand curve can be explained by using the law of diminishing marginal utility.  For instance, consider a consumer who ahs to choose between two goods, X and Y, which have prices Px and Py respectively.  Assume that the individual is rational and so wishes to maximise total utility subject to the size of the income.

The consumer will be maximising total utility when his or her income has been allocated in such a way that utility to be derived from the consumption of one extra shillings worth of X is equal to the utility to be derived from the consumption of one extra shillings worth of Y.  In other words, when the marginal utility per shilling of X is equal to the marginal utility per shilling of Y.  Only when this is true will it not be possible to increase total utility by switching expenditure from one good to another.  This condition for consumer equilibrium can be written as follows:

                        Mux = Muy

                          Px     Py

Where MUx and MUy are the marginal utilities of X and Y respectively and Px and Py are the

prices (in shillings) of X and Y respectively.

Any number of commodities may then be added to the equation. The table below gives hypothetical marginal utility figures for a consumer who wishes to distribute expenditure of K£44 between three commodities X, Y and Z.

Marginal utilities derived from each Kg of:

Kg consumed

x (£8/kg)

Y (£4/kg)

Z (£2/kg)






























In order to maximize utility, the consumer must distribute available income so that:

1886_marginal utility.png

From the table you can see that this yields, a selection where the consumer buys 2 kg of X, 4 kg of Y and 6 kg of Z.  Hence:

210_marginal utility1.png

If the consumer wishes to spend all the K£44, it is impossible to distribute it any other way which would yield greater total quality.  This theorem is called the concept of equi-marginal utilities.

Posted Date: 11/27/2012 5:15:27 AM | Location : United States

Related Discussions:- Marginal utility approach, Assignment Help, Ask Question on Marginal utility approach, Get Answer, Expert's Help, Marginal utility approach Discussions

Write discussion on Marginal utility approach
Your posts are moderated
Related Questions
introduction, evaluation,principle, activities concept behind Gatt & wto

Q. What is Monopoly? The term 'Monopoly' has been derivative of Greek term 'Monopolies' that means a single seller. So, monopoly is a market condition in that there is a single

My assignment is listed below, I need to know if you can correctly complete this entire assignment by providing the entire completed, mistake free solution, including providing the

Disadvantages of the Planned System The centrally planned economies suffer from the following limitations: Lack of choice:   Consumers have little influence over what is p

Problem 1: Using relevant examples, discuss the pricing strategies that firms can use to capture value from their customers. Problem 2: You are a manager in a perfectl

Suppose you are an efficient expert hired by a manufacturing firm that uses two inputs, labor (L) and capital (K). The firm produces and sells a given output. You have the followin

State the types of demand elasticity Income Elasticity: Elasticity of demand with respect to change in consumer's income. Price Expectation Elasticity of Demand: Elast

National Income National Income is a measure of the money value of goods and services becoming available to a nation from economic activities. It can also be defined as the to

What is increasing marginal cost? Felix’s marginal cost is greater the more lawns he has previously mowed. It is, every time he mows a lawn, the extra cost of doing still anoth

Hawtrey views about Trade Cycle Hawtrey views trade cycle as a purely monetary phenomenon. According to him, inventory cycles result from fluctuations caused in the desired rat