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CHAPTER-4
THEORY OF CONSUMER DEMAND
Learning Objectives
After completing this chapter, the student should be able to:
1. 2.
Explain the law of diminishing marginal utility. Appreciate the distinction between cardinal and ordinal measurement of utility.
3.
4.
5.
Utility
Utility refers to the want satisfying power of a commodity.
Demand Curve
Indifferent Curve A graphic representation of various combinations of two goods, say X and Y, which is yielding equal satisfaction to the customer. Characterization of an indifference curve - Negative Slope - Convexity - No Intersection - Need not be parallel - Ordinal measurement of utility - Level of satisfaction.
Himalaya Publishing House Managerial Economics Theory and Applications Dr. D. M. Mithani
Definition. An indifference schedule is a list of alternative combinations in the stocks of two goods which yield equal satisfaction to the consumer.
It represents all possible combinations of two goods under consideration (in this illustration, n apples and bananas), that give the consumer equal satisfaction.
Himalaya Publishing House Managerial Economics Theory and Applications Dr. D. M. Mithani
Economic Theorem. Consumer equilibrium is attained when, given his budget constraint, the consumer reaches the highest possible point in the indifference curve.
Managerial Economics Theory and Applications Dr. D. M. Mithani
Income Consumption Curve The curve representing income effect on demand for a product caused by the change in income of the consumer.
Definition. A Giffen good is a typically inferior good having a stronger negative effect than the positive substitution effect of a fall in price, inducing a reduction in the quantity demanded.
Managerial Economics Theory and Applications Dr. D. M. Mithani