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Utility and Demand Theory - Term Paper Example

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This paper utilizes the utility theory to show that assuming that there is only two good then an increase in the price of one good will reduces the demand of both goods, a reduction in the price of one good will result into an increase in the demand for the two goods…
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Utility and Demand Theory
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Utility and Demand Theory

Download file to see previous pages...  Marginal utility is an important concept when analysing the demand theory, marginal utility refers to the additional utility derived from the consumption of one extra unit of a good.  From the above chart and table it is evident that total utility increases but at a decreasing rate, this is because there is a decline in the marginal utility or the additional utility gained from the consumption of one extra unit of a good.The utility theory is based on a number of assumptions and they include the following: I. Consumers aim at maximising their utility level. Consumers will prefer more of a good than less. When we have good Y and X the consumer will prefer X to Y or Y to X.IV. If the consumer prefers Y to X, and that he or she prefers X to K then the customer prefers Y to K.V. The consumers experience diminishing marginal utility when the number of units of a good increases The number of units of goods consumed will be determined by the level of income, the level of income will determine the maximum number of units that can be purchased and therefore this aids in the development of a budget line. The opportunity cost will also determine the number of units consumed of a good, and finally, the number of units consumed will be determined by the level of utility derived. (Neumann, J, 2000)Given two goods Y and X and given that the price of X = 10 and price of Y = 15, also given that the level of income is 150 then the budget line will be determined as follows. ...Download file to see next pagesRead More
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