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MBA I SEM.
Objectives : To understand 1. Law of Diminishing Marginal Utility 2. Assumptions and Criticisms of DMU 3. Significance of Diminishing Marginal Utility
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4. Other Reasons
Law of Demand
Traditional Approach:
1 The Law of Diminishing Marginal Utility: Propounded by Alfred Marshall. The additional benefit which a person derives from a given increase of his stock of a thing diminishes with every increase in the stock that he already has
2 CHANGE IN THE NUMBER OF CONSUMERS: If a commodity becomes cheaper consumers increases and vice versa.
3 DIVERSE USES OF A COMMODITY: Ex. Electricity
Modern Approach:
1 Income Effect : Any change in the price of a commodity affects purchasing power of a household. 4
Assumptions:
Total wants are unlimited but a single want is satiable.
Criticisms of the Law of Diminishing Marginal Utility Cardinal Measurability of Utility is unrealistic : Psychic feeling and comparability can be done not measurement. Hypothesis of Independent Utility is wrong: Due to complementary or substitute goods . Marginal Utility of Money is not constant : It increases or decreases with the decline or increase in money. Successive units to be consumed at a particular point of time .
Does not split price effect into income and substitution effect.
As you consume more and more ,utility goes on diminishing .A consumer tries to maximize his satisfaction by equalising the marginal utility of the commodity with its price and is being attained sooner at Higher price. As total utility is maximum, marginal utility is zero or negative. By adding all the marginal utility , we can calculate the total utility.
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Modern Approach:
1 Income Effect : Any change in the price of a commodity increases or decreases the purchasing power of a household. 2 Substitution Effect: Ex. Tea and Coffee.
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