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Utility Maximization and the Demand Curve

Utility Maximization and the Demand Curve

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Utility Maximization and the Demand Curve:
This academic work discusses about utility maximization rule, and how to derive the demand curve. It also explains about income effects and substitution effects.
Are you having trouble with your microeconomics assignments? Let us help you at http://classof1.com/homework-help/microeconomics-homework-help/

Utility Maximization and the Demand Curve:
This academic work discusses about utility maximization rule, and how to derive the demand curve. It also explains about income effects and substitution effects.

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Published by: ClassOf1.com on Mar 26, 2014
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03/26/2014

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Microeconomics
 
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Subject: Microeconomics
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The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for submitting the same in lieu of their academic submissions for grades.
Utility Maximization and Demand Curve
 
Utility maximization rule
Utility maximization rule refers to the maximum satisfaction consumers have while spending their money. It indicates that the money from the income should be allocated in such a way that even the last money of the income spent should yield maximum utility. The marginal utility of each of the money spent should be equal to each product the consumers buy.
The theory of consumers’ pattern of buying uses the law of diminishing marginal utility 
, it explains on how the consumers allocate their income. The utility maximization model is based on some assumptions, they are:
 
 As the consumers income is limited due to limited resources so they face a budget constraint.
 
Consumers are believed to be rational, trying to make the most use of their income.
 
 All the commodities have price tags and consumers should buy alternative goods according to their income.
 
Consumers have clear choices of the goods they want to buy and the services that they want to avail thus, they know the marginal utility of the units of products.
Deriving the demand schedule and curve
Demand schedule and demand curve in economics represent the relationship between the price and quantity demanded that can satisfy all types of entrepreneurs. Both state the relationship  between the price or service of a product and the demand of that product or service. The income of the consumer also influences the demand but the demand schedule and demand curve consider only the price and neglects all other factors.
 
Subject: Microeconomics
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The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for submitting the same in lieu of their academic submissions for grades.
Demand schedule explains the relationship between the price and quantity demanded of the commodity with the help of some table figures. This demand schedule figure consists of two columns, one of price of the product and the other of the quantity demanded at that price. The price column shows different price levels while the quantity demanded column shows the quantity demand of the product at various price levels. Demand curve is the visual version of the demand schedule. It depicts on a two dimensional graph consisting of a vertical axis showing price and horizontal axis showing the quantity demanded. The demand schedule helps in creating the demand curve.  A downward sloping demand curve is explained by the change in the price of one product in the consumer's behavior pattern and it notes how these changes the maximum utility received from the demanded product.  A demand schedule can be observed by finding alternate prices at which that product can be sold and then assuming the quantity of that specific product the consumers will buy.
The Income effect
The income effect is the change in the individuals’ income or economy's income and how that
change will affect the quantity demanded of goods and services. The relationship between quantity demanded and income and is positive, as the income of the consumer increases so does the demand of the goods and services increases.
The Substitution effect
 As the prices of particular commodity increases the consumer tends to buy commodities of lesser price which suits their income. The demand of these less priced goods increases than the demand of the high priced goods. Similarly the opposite happens when the income of the consumers increase, then the consumers tend to stop buying inferior goods. This is known as substitution effect when one substitutes the other with respect to the income change of the consumers.

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