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saturation point (1)

Chapter 4 discusses Consumer Demand Theory, focusing on total and marginal utility, which describes how satisfaction from consuming a commodity increases with quantity but diminishes with each additional unit consumed. It introduces the concept of a saturation point where total utility peaks and marginal utility becomes zero. The chapter also explains consumer equilibrium, where a rational consumer maximizes utility by equalizing the utility per dollar spent across different commodities.

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66 views2 pages

saturation point (1)

Chapter 4 discusses Consumer Demand Theory, focusing on total and marginal utility, which describes how satisfaction from consuming a commodity increases with quantity but diminishes with each additional unit consumed. It introduces the concept of a saturation point where total utility peaks and marginal utility becomes zero. The chapter also explains consumer equilibrium, where a rational consumer maximizes utility by equalizing the utility per dollar spent across different commodities.

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ykaminiyadav
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER 4

Consumer Demand
Theory

4.1 TOTAL AND MARGINAL UTILITY


An individual demands a particular commodity because of the satisfaction or utility received from consum-
ing it. Up to a point, the more units of a commodity the individual consumes per unit of time, the greater the
total utility received. Although total utility increases, the extra or marginal utility received from consuming
each additional unit of the commodity usually decreases.
At some level of consumption, the total utility received by the individual from consuming the commodity will
reach a maximum and the marginal utility will be zero. This is the saturation point. Additional units of the com-
modity cause total utility to fall and marginal utility to become negative because of storage or disposal problems.

EXAMPLE 1. The first two columns of Table 4.1 give an individual’s hypothetical total utility (TU) schedule from con-
suming various alternative quantities of commodity X per unit of time. (Utility is here assumed to be measurable in terms of
a fictitious unit called the “util.”) Note that up to a point, as the individual consumes more units of X per unit of time, TUx
increases. Columns (1) and (3) of the table show this individual’s marginal utility (MU) schedule for commodity X. Each
value of column (3) is obtained by subtracting two successive values of column (2). For example, if the individual’s con-
sumption of X goes from zero units to 1 unit, the TUx goes from zero utils to 10 utils, giving a MUx of 10 utils. Similarly,
if the consumption of X rises from 1 unit to 2 units, the TUx rises from 10 to 18, giving a MUx of 8. Notice that as this
individual consumes more and more units of X per unit of time, the MUx falls.

Table 4.1
(1) Q x (2) TUx (3) MUx
0 0 ...
1 10 10
2 18 8
3 24 6
4 28 4
5 30 2
6 30 0
7 28 22

62
Copyright © 2006, 1992, 1983, 1974 by The McGraw-Hill Companies, Inc. Click here for terms of use.
CHAP. 4] CONSUMER DEMAND THEORY 63

EXAMPLE 2. If we plot the total and marginal utility schedules of Table 4.1, we get the total and marginal utility curves
of Fig. 4-1. Since marginal utility has been defined as the change in total utility in changing consumption by one unit, each
value of the MUx has been recorded midway between the two levels of consumption, in part (b) of the figure. The saturation
point (MUx ¼ 0) is reached when the individual increases consumption of X from 5 to 6 units. The falling MUx curve
illustrates the principle of diminishing marginal utility.

Fig. 4-1

4.2 CONSUMER EQUILIBRIUM


The objective of a rational consumer is to maximize the total utility or satisfaction derived from spending
personal income. This objective is reached and the consumer is said to be in equilibrium when able to spend
personal income in such a way that the utility or satisfaction of the last dollar spent on the various commodities
is the same. This can be expressed mathematically by

MUx MUy
¼ ¼ 
Px Py

subject to the constraint that

Px Qx þ Py Qy þ    ¼ M (the individual’s income)

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