Quiz 5: Consumer Choice: Individual and Market Demand

Business

Water is the basic need of life. There are number of different ways to use the water. One would use water for cleaning his/her home, to cook food. Water is also used to washing car, filling up a swimming pool, watering lawns, flowering beds, and vegetable gardens. If the price of water increases a little, then one will ignore that little increase because it may not affect on the usage of the water. If the price of water increases by a fairly large amount, then one will try to minimize the usage of water. One would give up filling up the swimming pool and continue with other consumption. If the price of water rises by a very large amount, then one would continue with necessary consumption of the water reduce the unnecessary consumption. One would reduce the consumption of water to wash the car, and vegetable gardens. Thus, an increase in the price of water leads to reduce the consumption of water. The rise in price do not affect on the consumption of the necessary goods.

Total utility is the summation of utils received from the consumption of each unit. It can be said that, as the consumption increases total utility increases, but after a particular point total utility increases less rapidly due to diminishing marginal utility. Higher consumption of gallons of water leads to a higher total utility. Consumption of 14 gallons of water gives less total utility than 22 gallons of water per day. Therefore, 22 gallons of water per day gives greater utility than 14 gallons of water per day.

The marginal utility is the utility derived from the consumption of last unit. After the consumption of each unit a consumer gets additional utility which is called as a marginal utility. An increase in the consumption of the same commodity is likely to reduce the utility derived from each successive unit. The marginal utility diminishes according to an increase in the consumption. Marginal utility differs from person to person. A consumer's feelings towards the commodity differ. It depends on the intensity of the consumer, that how urgently the consumer wants the commodity. A thirsty consumer needs water or any cold drink to drink. First glass of the water makes him feel relax. Second glass of water gives him/her relatively less utility than first one. We conclude that when the consumer is thirsty his marginal utility is highest for the first glass of water. His marginal utility becomes less after the consumption of second glass of water. Marginal utility of the third glass of water is minimal because now consumer is not thirsty. In the given example, one can only say that consumer gets highest or lowest marginal utility after the consumption. You cannot measure his satisfaction or the relief after the consumption. The satisfaction is immeasurable. Thus, one would not find the exact marginal utility on the basis of psychological measurement.

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