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Exceptions Of The Law Of Diminishing Marginal Utility

There are various limitations / exceptions of the law of diminishing marginal utility. Major limitations are as follows:

1. Homogeneous Commodity
The law of diminishing marginal utility assumes that there should be single commodity with homogeneous units. All units of the commodity should be of the same same size and quality. If the units are not identical, this law will not be applied.

2. No change in tastes, habits, customs, fashion and income of the consumer
There should not be changed in tastes, habits, customs, fashion and income of the consumer. If the income of a consumer increases, the marginal utility of a certain goods will increase. In such case, increase in consumption may yield greater satisfaction or utility.

3. Continuity
There should be continuity in the consumption of the commodity; otherwise the law of diminishing marginal utility will not apply. Units of the commodity should be consumed in succession at one particular time. If the interval between the various units of consumption is too long, marginal utility may become higher..

4. Suitable size of units
Units of the commodity should be of a suitable size. It must not be too small. For example, giving water to a thirsty man by spoon will increase the utility of the successive spoon of water.

5. Ordinary commodities
Commodities should be of an ordinary types. If the commodities are likes diamonds and jewels or hobby commodities like stamps, coins or paintings, the law of diminishing marginal utility does not apply.

6. Marginal utility of money not constant
Our intensity for money increases as we have more of it. No doubt the marginal utility of money does not become zero, but it definitely falls as a person gets more and more money.The marginal utility of money for a rich is less than a poor man.

7. Rational consumer
The consumer should be an economic man, who acts rationally. This law does  not apply to persons of special nature such as drunkard, druggist etc. Marginal utility of wine for drunkard increases with every peg of drinks.

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Concept Of The Law Of Diminishing Marginal Utility And Its Assumptions

Concept Of The Law Of Diminishing Marginal Utility
This law was first developed by a German economist Hermann Heinrich Gossen. This law is also known as the first law of Gosse. The law of diminishing marginal utility states that the marginal utility derived from the consumption of every additional unit goes on diminishing, other thing remaining the same.

The law of diminishing marginal utility is based on two important facts :
1. Though human wants are unlimited, each single want is satiable.
2. Commodities are not perfect substitute for each other.

Therefore, as a consumer consumes more and more units of a commodity, intensity of his/her want for the commodity goes on falling and reaches a point where a consumer do not want any more units of the commodity. That is, when saturation point is reached marginal utility of a commodity becomes zero. Thus, as the amount of consumption of a commodity increases, marginal utility decreases. The second fact is that the different commodities are not perfect substitutes for each other. Hence, when an individual consumes more and more units of a commodity, the intensity of his particular want for the commodity diminishes.

Assumptions Of The Law Of Diminishing Marginal Utility

- Consumer should be rational.
- Utility can be measured in the cardinal number.
- Marginal utility of money remains constant.
- All the units of consumption are homogeneous.
- There is continuous consumption of the commodity i.e, there is no time gap between the successive units of consumption.
- The units of consumptions are suitable in size.
- There is no change in tastes, nature, fashion and habits of the consumer.

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Concept Of Marginal Utility And Total Utility And Their Relationship

 Concept Of Marginal Utility
Marginal utility is the change in total utility by the consumption of an additional unit of a commodity. In other words, marginal utility is the addition to the total utility derived from the consumption of one additional unit. It is also called additional utility. Marginal utility can be explained with the help of an example. When a consumer consumes one orange, he gets total utility equal to 8 utils. By consuming second orange, total utility becomes 14 utils i.e 8+6. Therefore the marginal utility of the second orange is 6 utils i.e. 14-8.

 Concept Of Total Utility
The total satisfaction received from the consumption of given quantities of a commodity by a consumer within a given time period is called total utility. In other words, total utility is the sum of all marginal utilities obtained from the consumption of different units of  a commodity. For example, suppose a consumer consumes first unit of an orange and gets 8 utils utility. As he consumes second unit of orange his total utility increases to 14 utils i.e 8+6 if he gets 6 utils utility from second orange.In the same way total utility increases to 18 utils (8+6+4) as he consumes third orange and gets 4 utils from it.

Relationship Between Total Utility And Marginal Utility

1. Total utility is the sum total of marginal utility whereas marginal utility is the change in total utility.

2. Total utility generally remains positive while marginal utility may be positive, zero or even negative.

3. When marginal utility is positive, total utility rises.

4. When marginal utility is zero, total utility is the maximum.

5. When marginal utility is negative, total utility falls.

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Determinants Of Elasticity Of Demand

The elasticity of demand of any commodity is determined by a number of factors which are explained below:

1. Nature of commodity
The elasticity of demand for any commodity depends upon the nature of the commodity i.e. whether it is a necessity, comfort, or luxury. The demand for necessary of life generally less elastic. The demand for comfort products have neither very elastic nor very inelastic because with the rise or fall in their prices, the demand for them decrease or increase moderately. On the other hand, demand for luxurious product is more elastic because with a small change in their prices, there is a large change in their demand. But the demand for prestige goods is inelastic because they possess unique utility for the buyers who are prepared to buy them at all costs.

2. Substitutes
Commodities having substitutes have more elastic demand because with the change in the price of one commodity, the demand for its substitute is immediately affected. For example, if the price of coffee rises, the demand for coffee decreases and the demand for tea increases and vice-versa.

3.Goods having several uses
If the commodity has several uses, it has an elastic demand. For example, electricity has multiple uses. It is used for lighting, heating, cooking etc. If the tariffs of electricity increases, its uses will be restricted to important uses. On the other hand, it will be withdrawn for less important uses.

4. Joint demand
There are certain commodities which are jointly demanded such as car and petrol, pen and ink, bread and jam etc. The elasticity of demand of second commodity depends upon the elasticity of demand of the major commodity. If the demand for car is less elastic, the demand for petrol will be also less elastic. On the other hand, if the demand for bread is elastic, the demand for jam will also be elastic.

5. Postpone of the consumption
Those commodities whose consumption can be postponed will be elastic. For example, demand for constructing a house can be postponed. As a result, demand for bricks, cement, sand etc will be elastic. On the other hand, goods whose demand cannot be postponed, their demand will be inelastic.

6. Income of the consumer
The elasticity of demand also depends on income of the consumer. If the income of consumers is high, the elasticity of demand is less elastic. It is because change in the price will not affect the quantity demanded by a greater proportion. But in low income groups, the elasticity of demand is elastic. Because a rise or fall in the price of commodities will reduce or increase the demand. But this does not apply in the case of necessities.

7. Proportion of income spent
Goods on which a consumer spends a very small proportion of his income, e.g. salt, newspaper, tooth paste etc. the demand will nor be much affected by a change in the price. Hence, it will be inelastic. On the other hand, goods on which the consumer spends a large proportion of his income e.g clothes, food etc. their demand will be elastic.

8. Price level
The price level also influences the elasticity of demand for commodities. When price level is too high or too low, the demand will be comparatively inelastic.

9. Habits
People who are habituated to the consumption of a particular commodity like coffee, tea, cigarette of a particular brand, the demand for it will be inelastic.

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Concept Of Cardinal Utility Analysis And Its Assumptions

Concept Of Cardinal Utility Analysis
Cardinal utility analysis is based on the cardinal measurement of utility which assumes that utility is measurable and additive. This theory was developed by neo-classical economists like Marshall, Pigou, Robertson etc. It is expressed as a quantity measured in hypothetical units which called utils. If a consumer imagines that one mango has 8 utils and an apple 4 utils, it implies that the utility of mango is twice than of an apple.

Assumptions Of Cardinal Utility Analysis

1. Rationality
The consumer is assumed to the rational. He tries to maximize his total utility under the income constraint.

2. Cardinal Utility
The utility of each commodity is measurable. Utility is cardinal concept. The most convenient measure is money. Thus utility can be measured quantitatively in monetary units or cardinal units.

3. Constant Marginal Utility Of Money
The utility derived from commodities are measured in terms of money. So, money is a unit of measurement in cardinal approach. Hence, marginal utility of money should be constant.

4. Diminishing Marginal Utility
If the stock of commodities increases with the consumer, each additional stock or unit of the commodity gives him less and less satisfaction. It means utility increases at a decreasing rate.

5. Independent Utilities
It means utility obtained from commodity X is not dependent on utility obtained from commodity Y. It does not affected by the consumption of other commodities.

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Concept Of Cross Elasticity Of Demand And Its Types

Concept Of Cross Elasticity Of Demand

Cross elasticity of demand is the relation between the percentage change in demand for a commodity to the percentage change in the price of related commodity. The cross elasticity of demand between good A and B is :



Cross elasticity (exy) = % change in quantity demanded for A good / % change to price of B good.

Types Of Cross Elasticity Of Demand
Theoretically, there are two types of cross elasticity of demand:

1. Positive Cross Elasticity Of Demand (exy>0)
In the case of substitute goods, the cross elasticity of demand is positive. If the price of tea rises, it will lead to increase in the demand for coffee. Similarly, a fall in price of tea will cause a decrease in the demand for coffee.

2. Negative Cross Elasticity Of Demand (exy<0 comment-0--="">
In the case of complementary goods, cross elasticity of demand is negative. If the price of car rises, it will lead to decrease in the demand for petrol. Similarly, the fall in the price of car will bring the increase in the demand for petrol. Since, the price and demand change in opposite direction, the cross elasticity of demand is negative.

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Concept Of Income Elasticity Of Demand and Its Types

Concept Of Income Elasticity Of Demand
The income elasticity of demand shows the responsiveness of quantity demanded of a certain commodity to the change in income of the consumer. The income elasticity of demand is also defined as ' the ratio of the percentage change in the demand for a commodity to the percentage change in income'. Income elasticity of demand can be expressed as follows:

Income elasticity (ey) = Percentage change in quantity demanded / Percentage change in income

For example, consumer's income rises from $ 100 to $ 102, his demand for good X increases from 25 units per week to 30 units per week then his income elasticity of demand X is:

ey = 5/25 x 100/2 = 10

It means that 1 percent increase in income results 10 percent increase in demand and vice versa.

The income elasticity may be positive or negative or zero depending upon the nature of a commodity. As a rise in income leads to an increase in demand, the income elasticity is positive. A commodity which has positive income elasticity is a normal good. On the other hand, when a rise in income leads to a decrease in demand for a commodity, its income elasticity is negative. Such a commodity is called inferior good. If the quantity of a commodity purchased remains unchanged, even at the change in income, the income elasticity of demand is zero.

Types Of Income Elasticity Of Demand
There are five types of income elasticity of demand as follows:

1. Income elasticity greater than unity (ey>1)
The income elasticity of demand is greater than the unity when the demand for a commodity increases more than percentage rise in income.

2. Income elasticity less than unity(ey< 1)
Income elasticity of demand is less than the unity when the demand for a commodity increases less than proportionate to the rise in income.

3.Income elasticity equal to unity (ey=1)
Income elasticity is unity when the demand for a commodity increases in the same proportion as the rise in income.

4. Zero income elasticity (ey=0)
If the rise in income, the quantity demanded remains unchanged, the income elasticity is called zero income elasticity.

5. Negative income elasticity (ey <0>
In the case of inferior goods, the income elasticity of demand is negative. The consumer will reduce his purchase of it when income rises and vice versa.

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Concept Of Price Elasticity Of Demand
The price elasticity of demand measures the degree of responsiveness of quantity demanded for a certain commodity to the change in its price. In other words, the price elasticity of demand is defined as the 'ratio of percentage change in the quantity demanded to the percentage change in price . It can be expressed as follows:

Price elasticity of demand (ep) = Percentage change in quantity of demand / Percentage change in price

Where, ep = Coefficient of price elasticity of demand.

The price elasticity of demand is always negative due to the inverse relationship between the price and quantity demanded. But for the sake of simplicity in understanding the magnitude of response of quantity demanded to the change in the price we ignore the negative sign and take into account only the numerical value of the price elasticity of demand.

Types Of Price Elasticity Of Demand
There are five types of price elasticity of demand. They are as follows:

1. Perfectly Elastic Demand
Demand is said to be perfectly elastic if negligible change in price would lead to infinite change in the quantity demanded. Visibly, no change in price causes in infinite change in demand.

2. Perfectly Inelastic Demand
When the demand for a commodity does not change despite change in price, the demand is said to be perfectly inelastic.

3. Unitary Elastic Demand
When the percentage change in the quantity demanded is equal to the percentage change in price, the demand for a commodity is said to be unitary elastic demand. For example, 10% change in price causes 10% change in demand.

4. Relatively Elastic Demand
When the percentage change in the quantity demanded for a commodity is more than percentage change in price, it is called relatively elastic demand. For example, if 10% change in price results, 20% change in quantity demanded.

5. Relatively Inelastic Demand
When the percentage change in the quantity demanded of a commodity is less than percentage change in the price, it is called relatively inelastic demand. For example, when 20% change in price causes 10% change in demand.

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