The Law of Demand

Law of Diminishing
Marginal Utility
Total and Marginal
Utility
Theory of Consumer
Behavior
Utility Maximizing
Combination
Utility Maximization
and the Demand
Curve
Applications and
Extensions
Key Terms
Cardinal
Previous
Slide
Next
Slide Utility Analysis
End
Show
8-1
Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing
Marginal Utility
Total and Marginal Topics covered in Chapter 1
Utility
Theory of Consumer
Behavior
• Micro vs. Macro Economics
Utility Maximizing
Combination
• Demand
Utility Maximization
and the Demand
Curve
• Supply
Applications and
Extensions
• Elasticity
Key Terms
• Utility (Cardinal & Ordinal)
Previous Next
Slide Slide
End
Show
8-2
Copyright McGraw-Hill/Irwin, 2005
 Basic assumptions of Marginal
The Law of Demand Utility Analysis
Law of Diminishing
Marginal Utility
Total and Marginal
 Cardinal measurement of utility:- It is
Utility assumed that utility can be measured and
Theory of Consumer
Behavior can be given definite quantity like 1,2 or
Utility Maximizing
Combination
3.This means that a person can express the
Utility Maximization
and the Demand
satisfaction derived from consumption of
Curve commodity in quantitative term.
Applications and
Extensions  Utilities are independent:-Marginal utility
Key Terms assumes that utility of different commodities are
independent to each other.
Previous Next  Constant Marginal utility of money:-Another
Slide Slide important assumption is that the marginal utility of
End money remains constant.
Show
8-3
Copyright McGraw-Hill/Irwin, 2005
 BASIC LAWS OF MARGINAL
The Law of Demand UTILITY
Law of Diminishing
Marginal Utility
Total and Marginal
Utility
1. LAW OF DIMINISING
Theory of Consumer
Behavior
Utility Maximizing
MARGINAL UTILITY
Combination
Utility Maximization
and the Demand
Curve
Applications and
Extensions 2. LAW OF EQUI-
Key Terms

MARGINAL UTILITY
Previous Next
Slide Slide
End
Show
8-4
Copyright McGraw-Hill/Irwin, 2005
 LAW OF DIMINISHING MARGINAL
The Law of Demand
UTILITY
Law of Diminishing
Marginal Utility • This law can be stated as the fall in marginal
Total and Marginal utility of any good due to successive
Utility
Theory of Consumer consumption of that good.
Behavior
Utility Maximizing
For ex:- Suppose a person starts eating sweet, the
Combination
first sweet gives him great pleasure. By the time
Utility Maximization
and the Demand he taking second he yield less satisfaction; the
Curve
Applications and
satisfaction of third is less than that of second
Extensions
and so on. The additional satisfaction goes on
Key Terms
decreasing with every successive sweet till it
drops down to zero; and if the consumer forced
Previous Next
Slide Slide to take more the satisfaction may become less
End than zero.
Show
8-5
Copyright McGraw-Hill/Irwin, 2005
 TOTAL AND MARGINAL UTILITY
sweet Total Marginal
The Law of Demand consumed Utility, Utility, 30

Total Utility (utils)

Law of Diminishing After meal Utils Utils
Marginal Utility
20
Total and Marginal
Utility 0 0
Theory of Consumer
10
Behavior
Utility Maximizing
1 10
Combination
Utility Maximization
and the Demand
0 1 2 3 4 5 6 7
Curve
Applications and Units consumed per meal

Marginal Utility (utils)

Extensions 10
Key Terms 8
6
4
2
Previous Next 0
Slide Slide
-2
End 1 2 3 4 5 6 7
Show Units consumed per meal
8-6
Copyright McGraw-Hill/Irwin, 2005
 TOTAL AND MARGINAL UTILITY
sweet Total Marginal
The Law of Demand consumed Utility, Utility, 30

Total Utility (utils)

Law of Diminishing After meal Utils Utils
Marginal Utility
20
Total and Marginal
Utility 0 0
Theory of Consumer 10 10
Behavior
Utility Maximizing
1 10
Combination
Utility Maximization
and the Demand
0 1 2 3 4 5 6 7
Curve
Applications and Units consumed per meal

Marginal Utility (utils)

Extensions 10
Key Terms 8
6
4
2
Previous Next 0
Slide Slide
-2
End 1 2 3 4 5 6 7
Show Units consumed per meal
8-7
Copyright McGraw-Hill/Irwin, 2005
 TOTAL AND MARGINAL UTILITY
sweet Total Marginal
The Law of Demand consumed Utility, Utility, 30

Total Utility (utils)

Law of Diminishing After meal Utils Utils
Marginal Utility
20
Total and Marginal
Utility 0 0
Theory of Consumer 10 10
Behavior
1 10
Utility Maximizing 8
Combination
Utility Maximization
2 18
and the Demand
0 1 2 3 4 5 6 7
Curve
Applications and Units consumed per meal

Marginal Utility (utils)

Extensions 10
Key Terms 8
6
4
2
Previous Next 0
Slide Slide
-2
End 1 2 3 4 5 6 7
Show Units consumed per meal
8-8
Copyright McGraw-Hill/Irwin, 2005
 TOTAL AND MARGINAL UTILITY
sweet Total Marginal
The Law of Demand consumed Utility, Utility, 30

Total Utility (utils)

Law of Diminishing After meal Utils Utils
Marginal Utility
20
Total and Marginal
Utility 0 0
Theory of Consumer 10 10
Behavior
1 10
Utility Maximizing 8
Combination
2 18
Utility Maximization
6
and the Demand
Curve 3 24 0 1 2 3 4 5 6 7

Applications and Units consumed per meal

Marginal Utility (utils)

Extensions 10
Key Terms 8
6
4
2
Previous Next 0
Slide Slide
-2
End 1 2 3 4 5 6 7
Show Units consumed per meal
8-9
Copyright McGraw-Hill/Irwin, 2005
 TOTAL AND MARGINAL UTILITY
sweet Total Marginal
The Law of Demand consumed Utility, Utility, 30

Total Utility (utils)

Law of Diminishing After meal Utils Utils
Marginal Utility
20
Total and Marginal
Utility 0 0
Theory of Consumer 10 10
Behavior
1 10
Utility Maximizing 8
Combination
2 18
Utility Maximization
6
and the Demand
Curve 3 24 0 1 2 3 4 5 6 7

4 Units consumed per meal

Applications and
4 28
Marginal Utility (utils)
Extensions 10
Key Terms 8
6
4
2
Previous Next 0
Slide Slide
-2
End 1 2 3 4 5 6 7
Show Units consumed per meal
8 - 10
Copyright McGraw-Hill/Irwin, 2005
 TOTAL AND MARGINAL UTILITY
sweet Total Marginal
The Law of Demand consumed Utility, Utility, 30

Total Utility (utils)

Law of Diminishing After meal Utils Utils
Marginal Utility
20
Total and Marginal
Utility 0 0
Theory of Consumer 10 10
Behavior
1 10
Utility Maximizing 8
Combination
2 18
Utility Maximization
6
and the Demand
Curve 3 24 0 1 2 3 4 5 6 7

4 Units consumed per meal

Applications and
4 28
Marginal Utility (utils)
Extensions 10
Key Terms 2 8
5 30 6
4
2
Previous Next 0
Slide Slide
-2
End 1 2 3 4 5 6 7
Show Units consumed per meal
8 - 11
Copyright McGraw-Hill/Irwin, 2005
 TOTAL AND MARGINAL UTILITY
sweet Total Marginal
The Law of Demand consumed Utility, Utility, 30

Total Utility (utils)

Law of Diminishing After meal Utils Utils
Marginal Utility
20
Total and Marginal
Utility 0 0
Theory of Consumer 10 10
Behavior
1 10
Utility Maximizing 8
Combination
2 18
Utility Maximization
6
and the Demand
Curve 3 24 0 1 2 3 4 5 6 7

4 Units consumed per meal

Applications and
4 28
Marginal Utility (utils)
Extensions 10
Key Terms 2 8
5 30 6
0 4

Previous Next 6 30 2
0
Slide Slide
-2
End 1 2 3 4 5 6 7
Show Units consumed per meal
8 - 12
Copyright McGraw-Hill/Irwin, 2005
 TOTAL AND MARGINAL UTILITY
sweet Total Marginal TU
The Law of Demand consumed Utility, Utility, 30

Total Utility (utils)

Law of Diminishing After meal Utils Utils
Marginal Utility
20
Total and Marginal
Utility 0 0
Theory of Consumer 10 10
Behavior
1 10
Utility Maximizing 8
Combination
2 18
Utility Maximization
6
and the Demand
Curve 3 24 0 1 2 3 4 5 6 7

4 Units consumed per meal

Applications and
4 28
Marginal Utility (utils)
Extensions 10
Key Terms 2 8
5 30 6
0 4
6 30 2
Previous
Slide
Next
Slide -2 0
MU
End
7 28 -2
1 2 3 4 5 6 7
Show Units consumed per meal
8 - 13
Copyright McGraw-Hill/Irwin, 2005
 TOTAL AND MARGINAL UTILITY
sweet Total Marginal TU
The Law of Demand consumed Utility, Utility, 30

Total Utility (utils)

Law of Diminishing After meal Utils Utils
Marginal Utility
Total and Marginal
Utility 0 0
20
Observe
Theory of Consumer 10 10 Diminishing
Behavior
1 10
Utility Maximizing 8
Combination
2 18 Marginal
Utility Maximization
6
and the Demand
Curve 3 24 0 1
Utility
2 3 4 5 6 7

4 Units consumed per meal

Applications and
4 28
Marginal Utility (utils)
Extensions 10
Key Terms 2 8
5 30 6
0 4
6 30 2
Previous
Slide
Next
Slide -2 0
MU
End
7 28 -2
1 2 3 4 5 6 7
Show Units consumed per meal
8 - 14
Copyright McGraw-Hill/Irwin, 2005
 THEORY OF CONSUMER BEHAVIOR
The Law of Demand
Consumer Choice and
Law of Diminishing
Marginal Utility
Budget Constraint
Total and Marginal
Utility
Theory of Consumer
Behavior • Rational Behavior (means that the
Utility Maximizing
Combination
consumer wants to gain maximum satisfaction
Utility Maximization with limited resources)
and the Demand
Curve • Consumer’s income is given (limited
Applications and
Extensions resources)
Key Terms
• Spend all income on goods
Previous Next
consumption
Slide
End
Slide
• The prices of the commodities are
Show
8 - 15
constant
Copyright McGraw-Hill/Irwin, 2005
 Law of Equi-Marginal Utility
The Law of Demand
Law of Diminishing
Marginal Utility
Total and Marginal
The consumer’s money income
Utility
Theory of Consumer
Behavior
should be allocated on products
Utility Maximizing
Combination in such a way that the last rupee/
Utility Maximization
and the Demand
Curve
unit spent on each product
Applications and
Extensions yields the same amount of
Key Terms
marginal utility
Previous Next
Slide Slide
End
Show
illustrated...
8 - 16
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
Rs. 10
The Law of Demand Price = Rs.1 Price = Rs.2
Law of Diminishing
income Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal Unit of utility, rupee utility, rupee
Utility
product utils (MU/price) utils (MU/price)
Theory of Consumer
Behavior
Utility Maximizing
Combination First 10 10 24 12
Utility Maximization
and the Demand
Curve
Applications and
Extensions
Key Terms
How should the Rs.10
Previous Next
income be allocated?
Slide Slide
End
Show
8 - 17
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
Rs. 10
The Law of Demand Price = Rs.1 Price = Rs.2
Law of Diminishing
income Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal Unit of utility, rupee utility, rupee
Utility
product utils (MU/price) utils (MU/price)
Theory of Consumer
Behavior
Utility Maximizing
Combination First 10 10 24 12
Utility Maximization
and the Demand
Curve

Examine the two

Applications and
Extensions
Key Terms

Previous Next
marginal utilities
Slide Slide
End
Show
8 - 18
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
Rs. 10
The Law of Demand Price = $1 Price = $2
Law of Diminishing
income Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal Unit of utility, rupee utility, rupee
Utility
product utils (MU/price) utils (MU/price)
Theory of Consumer
Behavior
Utility Maximizing
Combination First 10 10 24 12
Utility Maximization
and the Demand
Curve

Examine the two

Applications and
Extensions
Key Terms

Previous Next
marginal utilities
Slide Slide
End
Show
…per rupee
8 - 19
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
Rs. 10
The Law of Demand Price = Rs.1 Price = Rs. 2
Law of Diminishing
income Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal Unit of utility, rupee utility, rupee
Utility
product utils (MU/price) utils (MU/price)
Theory of Consumer
Behavior
Utility Maximizing
Combination First 10 10 24 12
Utility Maximization
and the Demand
Curve
Applications and
Extensions
Key Terms
Decision: Buy 1
Previous Next
Product B for Rs.2
Slide Slide
End
Show
8 - 20
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
Rs. 10
The Law of Demand Price = Rs.1 Price = Rs.2
Law of Diminishing
income Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal Unit of utility, rupee utility, rupee
Utility
product utils (MU/price) utils (MU/price)
Theory of Consumer
Behavior
Utility Maximizing
Combination First 10 10 24 12
Utility Maximization
and the Demand
Curve
Second 8 8 20 10
Applications and
Extensions
Third 7 7 18 9
Key Terms
Fourth What
6 next?
6 16 8
Previous Next
Fifth 5 5 12 6
Slide Slide
Sixth 4 4 6 3
End
Show
8 - 21
Seventh 3 3 4 2
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
Rs. 10
The Law of Demand Price = Rs. 1 Price = Rs. 2
Law of Diminishing
income Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal Unit of utility, rupee utility, rupee
Utility
product utils (MU/price) utils (MU/price)
Theory of Consumer
Behavior
Utility Maximizing
Combination First 10 10 24 12
Utility Maximization
and the Demand
Curve
Second 8 8 20 10
Applications and
Extensions
Third 7 7 18 9
Key Terms
Fourth 6 6 16 8
Previous Next
Fifth 5 5 12 6
Slide Slide
Sixth 4 4 6 3
End
Show
8 - 22
Seventh 3 3 4 2
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
Rs. 10
The Law of Demand Price = Rs. 1 Price = Rs. 2
Law of Diminishing
income Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal Unit of utility, rupee utility, rupee
Utility
product utils (MU/price) utils (MU/price)
Theory of Consumer
Behavior
Utility Maximizing
Combination First 10 10 24 12
Utility Maximization
and the Demand
Curve
Second 8 8 20 10
Applications and
Extensions
Third 7 7 18 9
Key Terms
Fourth 6 6 16 8
Fifth
and
5
then...
5 12 6
Sixth (Rs.5 4left) 6
Previous Next
Slide Slide
4 3
End
Show
8 - 23
Seventh 3 3 4 2
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
Rs. 10
The Law of Demand Price = Rs. 1 Price = Rs. 2
Law of Diminishing
income Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal Unit of utility, rupee utility, rupee
Utility
product utils (MU/price) utils (MU/price)
Theory of Consumer
Behavior
Utility Maximizing
Combination First 10 10 24 12
Utility Maximization
and the Demand
Curve
Second 8 8 20 10
Applications and
Extensions
Third 7 7 18 9
Key Terms
Fourth 6 6 16 8
Fifth third
5 unit
5 of12 6
Sixth product B 6
Previous Next
Slide Slide
4 4 3
End
Show
8 - 24
Seventh 3 3 4 2
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
Rs. 10
The Law of Demand Price = Rs. 1 Price = Rs. 2
Law of Diminishing
income Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal Unit of utility, rupee utility, rupee
Utility
product utils (MU/price) utils (MU/price)
Theory of Consumer
Behavior
Utility Maximizing
Combination First 10 10 24 12
Utility Maximization
and the Demand
Curve
Second 8 8 20 10
Applications and
Extensions
Third 7 7 18 9
Key Terms
Fourth 6 6
Rs. 3 left... 16 8
Previous Next
Fifth 5 5 12 6
Slide Slide
Sixth 4 4 6 3
End
Show
8 - 25
Seventh 3 3 4 2
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
Rs. 10
The Law of Demand Price = Rs. 1 Price = Rs. 2
Law of Diminishing
income Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal Unit of utility, dollar utility, dollar
Utility
product utils (MU/price) utils (MU/price)
Theory of Consumer
Behavior
Utility Maximizing
Combination First 10 10 24 12
Utility Maximization
and the Demand
Curve
Second 8 8 20 10
Applications and
Extensions
Third 7 7 18 9
Key Terms
Fourth 6 6
Rs. 3 left... 16 8
Fifth 5 5 12 6
Previous
Slide
Next
Slide
Buy
Sixth both!
4 4 6 3
End
Show
8 - 26
Seventh 3 3 4 2
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
Rs. 10
The Law of Demand Price = Rs. 1 Price = Rs. 2
Law of Diminishing
income Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal Unit of utility, rupee utility, rupee
Utility
product utils (MU/price) utils (MU/price)
Theory of Consumer
Behavior
Utility Maximizing
Combination First 10 10 24 12
Utility Maximization
and the Demand
Curve
Second 8 8 20 10
Applications and
Extensions
Third 7
Income is gone... 7 18 9
Key Terms
Fourth
the last rupee 6spent on6 16 8
each good gave the same
Fifth 5 5 12 6
Previous Next utility (8) per rupee/ price
Slide Slide
Sixth 4 4 6 3
End
Show
8 - 27
Seventh 3 3 4 2
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION

The Law of Demand

Law of Diminishing
Algebraic Restatement of the
Marginal Utility
Total and Marginal
Utility
Utility Maximization Rule
Theory of Consumer
Behavior
Utility Maximizing
Combination
MU of product A MU of product B
Utility Maximization
and the Demand
Curve Price of A
= Price of B
Applications and
Extensions
Key Terms

8 Utils 16 Utils
Previous
Slide
Next
Slide
Rs.1
= Rs.2
End
Show
8 - 28
Copyright McGraw-Hill/Irwin, 2005