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Describe how the slope of the demand curve can be explained by the principle of diminishing marginal utility?
Wiki User
∙ 9y ago
People only need so much of one thing. The lower the price the more demand you will have for the product, until the customer does not want anymore. At that time it will not matter what the price is, they will not purchase any more.
Wiki User
∙ 9y ago
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How the slope of the demand curve can be explained by the principle of marginal utility?
The demand curve is negatively sloped because it is based on the principle of marginal utility and this utility decreases as consumption increases. The demand price which depends on the marginal utility of a good also declines as consumption increases, so quantity and price are inversely related, leading to the negative curve and the law of demand.
What is the equi-marginal principle?
We will use the utility theory to explain consumer demand and to understand the nature of demand curves. For this purpose, we need to know the condition under which I, as a consumer, am most satisfied with my market basket of consumption goods. We say that a consumer attempts to maximize his or her utility, which means that the consumer chooses the most preferred of goods from what is available. Can we see what a rule for such an optimal decision would be? Certainly I would not expect that the last egg I am buying bring exactly the same marginal utility as the last pair of shoes I am buying, for shoes cost much more per unit than eggs. A more sensible rule would be: If good A costs twice as much as good B, then buy good A only when its marginal utility is at least twice as great as good B's marginal utility. This leads to the equimarginal principle that I should arrange my consumption so that every single good is bringing me the same marginal utility per dollar of expenditure. In such a situation, I am attaining maximum satisfaction or utility from my purchases. This is clear concept of equimarginal principle.
Why are profit maximize when marginal revenue is equal to marginal cost?
Profits are maximized when marginal costs equals marginal revenue because fixed costs are now spread over a larger amount of revenue. This means that total cost per unit declines and profits increase. Another way to say this is that this is the effect of scale. When marginal revenue equals marginal costs, in a growing revenue situation, you gain economies of scale and higher profits.
What is the difference between marginal benefits and marginal costs?
The term marginal cost refers to the oppurtunity cost associated with producing one more additional unit of a good. Opportunity cost is a critical concept to economics - it refers to the value of the highest value alternative opportunity. For example, in examining the marginal cost of producing one more bushel of wheat, that number could be expressed as the dollar value of corn or other goods that could be produced in lieu of more wheat. Marginal benefit refers to what people are willing to give up in order to obtain one more unit of a good, while marginal cost refers to the value of what is given up in order to produce that additional unit. Additional units of a good should be produced as long as marginal benefit exceeds marginal cost. It would be inefficient to produce goods when the marginal benefit is less than the marginal cost. Therefore an efficient level of product is achieved when marginal benefit is equal to marginal cost.
Examples of law of diminishing returns?
Suppose that one kilogram of seed applied to a plot of land of a fixed size produces one ton of crop. You might expect that an additional kilogram of seed would produce an additional ton of output. However, if there are diminishing marginal returns, that additional kilogram will produce less than one additional ton of crop (ceteris paribus). For example, the second kilogram of seed may only produce a half ton of extra output. Diminishing marginal returns also implies that a third kilogram of seed will produce an additional crop that is even less than a half ton of additional output. Assume that it is one quarter of a ton. In economics, the term "marginal" is used to mean on the edge of productivity in a production system. The difference in the investment of seed in these three scenarios is one kilogram - "marginal investment in seed is one kilogram." And the difference in output, the crops, is one ton for the first kilogram of seeds, a half ton for the second kilogram, and one quarter of a ton for the third kilogram. Thus, the marginal physical product (MPP) of the seed will fall as the total amount of seed planted rises. In this example, the marginal product (or return) equals the extra amount of crop produced divided by the extra amount of seeds planted. A consequence of diminishing marginal returns is that as total investment increases, the total return on investment as a proportion of the total investment (the average product or return) decreases. The return from investing the first kilogram is 1 t/kg. The total return when 2 kg of seed are invested is 1.5/2 = 0.75 t/kg, while the total return when 3 kg are invested is 1.75/3 = 0.58 t/kg. Another example is a factory that has a fixed stock of capital, or tools and machines, and a variable supply of labor. As the firm increases the number of workers, the total output of the firm grows but at an ever-decreasing rate. This is because after a certain point, the factory becomes overcrowded and workers begin to form lines to use the machines. The long-run solution to this problem is to increase the stock of capital, that is, to buy more machines and to build more factories.
How does the principle of diminishing marginal utility explain the slope of the demand curve?
The principle of diminishing marginal utility explains the slope of the demand curve by letting us be able to see which direction the slope is in, which is always downward.
Criticism of law of diminishing marginal utility?
the criticisma of the law of diminishing marginal utility
Why does the marginal rate of substitution diminish?
As a matter of fact, law of diminishing marginal rate of substitution conforms to the law of diminishing marginal utility. According to law of diminishing marginal utility, as a consumer increases the consumption of a good, its marginal utility goes on diminishing. On the contrary, if the consumption of a good decreases, its marginal utility goes on increasing.
What is this called when a buyer purchases a good each additional item type is less satisfying than the earlier one?
This is known as diminishing marginal utility. It is the principle that the satisfaction or utility derived from consuming each additional unit of a good decreases as more of it is consumed. This concept is a fundamental principle in economics and helps explain consumer behavior.
Explain the merits and demerits of law of diminishing marginal utility?
explain the demerits of diminishing marginal utility
What is the difference between equi-marginal utility and diminishing marginal utility?
What is the difference between equi-marginal utility and diminishing marginal utility?Read more:What_is_the_difference_between_equi-marginal_utility_and_diminishing_marginal_utility
What war the 3 stages of production?
Three stages of production are increasing marginal returns, diminishing marginal returns, and negative marginal returns.
If marginal utility is positive but diminishing then?
Total utility increases at a diminishing rate
When a buyer purchases a good each additional item of a certain type is less satisfying than the earlier ones?
This is the principle of diminishing marginal utility.
What does Aggregate marginal willingness to pay mean?
An aggregate demand curve is derived from the principle of diminishing marginal utility and it shows the amount of a good (or service) consumers would buy at different prices over some time period. Diminishing marginal utility implies that as the number of units consumed increases, the willingness to pay for additional units of that good (i.e., marginal WTP, MWTP) goes down.
How does an individual or household benefit from the law of diminishing marginal utility?
what is it marginal utility
What is a sentence with marginal utility?
The expected marginal utility of the next unit of water is diminishing.
