Lack Of Marginal Utility Theory

989 WordsNov 8, 20144 Pages
Suppliers might have to do a market research in order to forecast the consumer behaviour. To do this efficiently, firms might use marginal utility theory, namely principle of diminishing marginal utility together with indifference analysis. Utility is the satisfaction that people earn from the consumption of a certain quantity of a product (Mankiw and Taylor, 2014). Marginal utility is the additional satisfaction that customer gains from consuming one extra unit within a given period of time. However, the more of a product a person consumes, the less additional utility they are able to gain from that extra unit. Understanding this situation, economists come up with indifference analysis. Indifference analysis shows how consumer chooses the combination between two goods but still obtains the same satisfaction and indifference curve is the graph which illustrates that combination. It means, at any points on indifference curve, the consumer is indifferent about how to combine the two goods. Diagrammatically, if a person chooses 6 units of good Y with 2 units of good X, his utility will not be different from choosing 4 units of Y with 3 units of X, as long as those points are still on the curve. Most indifference curves have a convex shape and the reason is this. The lower units of good Y, the bigger quantity of good X in order to satisfy the loss of good Y. Nevertheless, the amount of giving up one of these two good cannot be the same. In other words, if the one of the
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