Demand, Supply and Market Price Determination

Topics: Supply and demand, Marginal utility, Demand curve Pages: 4 (1479 words) Published: November 11, 2010
Demand, Supply and Market Price Determination

Consumer behaviour Utility is the economist’s term for the satisfaction a customer derives from the goods that they buy. Marginal utility is the increase in total utility arising from an increase in consumption by one more. For example, suppose I like eating bananas, and I have already eaten one banana; then the satisfaction I get from consuming a second banana is called by economists the marginal utility. Marginal utility is the utility gain from the consumption of one more item. Basically, economists are assuming that people derive satisfaction from the consumption of goods in general, and that people seek to consume as much as they can within their budget. However, the Law of diminishing marginal utility states that the rate at which total utility rises diminishes as consumption of a good increases and that eventually there will be negative marginal utility. To explain this, imagine eating bananas. The first banana is delicious. Already, by the time you reach the second banana your hunger has been partially satisfied, and although the second banana is also delicious, it does not give as much satisfaction as the first. Nonetheless, the satisfaction is still positive, so total utility is still rising. However, by the time you get to your tenth banana you may be feeling sick of bananas, and sooner or later, as you consume more and more of a good, you will less and less satisfaction from it.

Price as a measure of utility The price that we are prepared to pay for a good is related to the satisfaction we gain from it. Say one has a choice between two goods, both of which yield the same utility on consumption. Then it makes no sense to pay more for one of the goods than for the other. Thus, price is thought to be proportional to utility for each individual person. The Optimum position for a consumer is when he or she maximizes his satisfaction (his utility) for a given fixed income. Consumers distribute their...
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