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Consumer Behaviour and Theory of Production (Contd)

The document discusses several economic concepts related to consumer behavior and production theory. It defines the law of diminishing marginal utility, which states that the utility derived from consuming additional units of a good decreases as consumption increases. It also discusses cardinal utility theory and how it can be used to derive the law of demand. Finally, it explains the laws of returns to scale - increasing, decreasing, and constant - which describe how total output changes in response to proportional changes in inputs.

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Niraj Goswami
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95 views25 pages

Consumer Behaviour and Theory of Production (Contd)

The document discusses several economic concepts related to consumer behavior and production theory. It defines the law of diminishing marginal utility, which states that the utility derived from consuming additional units of a good decreases as consumption increases. It also discusses cardinal utility theory and how it can be used to derive the law of demand. Finally, it explains the laws of returns to scale - increasing, decreasing, and constant - which describe how total output changes in response to proportional changes in inputs.

Uploaded by

Niraj Goswami
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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CONSUMER BEHAVIOUR AND THEORY OF PRODUCTION(CONTD)

Law of diminishing Utility


It states that As the Quantity consumed of a commodity increases( )the utility derived from each successive unit decreases ( ) ,consumption of all other commodities is same remaining the same.

Example
NO OF UNITS CONSUMED 1 2 3 4 5 6 TOTAL UTILITY MARGINAL UTILITY 30 50 60 65 60 45 30 20 10 5 -5 -15

Assumptions of Law of Diminishing Utility


The Unit of the Consumer must be Standard one The taste of Preference Continuity in consumption Mental Condition

Cardinal Utility
It is the oldest Theory of Demand which explains consumers demand for product and dervies the law of demand This law of demand establishes an inverse relationship between price and quantity demanded for product

Assumptions of Cardinal Utility


Rationality Limited Money Income Maximization of Satisfaction Utility is Cardinally Measurable Diminishing Marginal Utility Constant Marginal Utility of Money Utility is Additive

Law Of Demand
The Law of demand states that the demand for a commodity increases when its price decreases and falls down when its price rises,other things remaining constant.

DEMAND SCHEDULE
The law of demand can be presented through a demand schedule,where series of prices are arranged in descending or ascending order & the corresponding quantities which consumer would like to buy per unit time

THE CURVE

DEMAND

A Demand curve is a locus of points showing various alternative Price-quanity combinations. The Demand curve shows the quantities of commodity which a consumer would buy at different prices per unit of time.

Shift in demand curve

When the demand curve changes its position( retaining its slope though not necessarily),the change is known as shift in demand curve. Here,in above graph Right ward shift denotes Increase in demand Left ward shift denotes Decrease in demand. Reason for shifts in demand curve are increase in income of consumer, substitute goods effect etc

LAW OF DIMINISHING RETURNS


It states that,when more and more units of variable i/p are applied to a given quantity of fixed i/p,the total o/p it will increase at an increasing rate and than at a constant rate,but it will eventually increase at diminishing rates. Assumptions: I. The state of technology is given II.Labour is homogenous

Input-output relationship in the short run


Assume there are two factors only: capital (fixed) and labour (variable). Technology is constant.
Labour 1 2 3 4 5 6 7 8 9 10 Total product (units) 4 10 20 28 34 38 40 40 39 37 The total product of labour is the total output produced by labour in a given period of time holding capital and technology constant.

TP ________ initially and increases decreases eventually with increasing amount of workers.
The Law of DMP 12

Input-output relationship in the short run


Average product (AP) is total product divided by the ________________. number of workers
Labour 1 2 3 4 5 6 7 8 9 10 Total product (units) 4 10 20 28 34 38 40 40 39 37 Average product (units) 4.00 5.00 6.60 7.00 6.80 6.34 5.72 5.00 4.34 3.70
The Law of DMP

AP ________ increases initially but decreases ________ eventually.

13

Input-output relationship in the short run


Marginal product (MP) is the change in total product as a result of _______________. change in input
Labour 1 2 3 4 5 6 7 8 9 10 Total product (units) 4 10 20 28 34 38 40 40 39 37 Marginal product (units) 4 6 10 8 6 4 2 0 -1 -2
The Law of DMP

MP of nth unit TP of n units =_______________ - TP of (n-1) units _______________ MP ________ increases initially but decreases ________ eventually.

14

Returns To Scale
The laws of returns to scale explain the behavior of output in response to a proportional and simultaneous change in inputs. Increasing inputs proportionately and simultaneously is, in fact, an expansion of the scale of production.

RETURN OF SCALE
1. 2. 3. When a firm increases both the inputs proportionately, there are three possibilities Total output may increase more than proportionately Total output may increase proportionately Total output may increase less than proportionately

Accordingly, there are three kinds of return to scale 1. Increasing returns to scale 2. Constant returns To Scale 3. Decreasing returns to scale

Increasing Returns to Scale


Increasing return to scale refers to when output increases in a greater proportion than the increase in input.

The Causes of Increasing Returns To Scale


1. Indivisibilities of factors 2. Higher degree of specialization 3. Dimensional relations

Decreasing returns to scale


The firms are faced with decreasing returns to scale when a certain proportionate change in inputs, k & l, lead to less than proportionate change in output.

Causes of Diminishing return to scale


The decreasing returns to scale are attributed to the diseconomies of scale. The most important factor causing this is the diminishing return to management. Another factor is the exhaustibility of natural resources.

Constant returns to scale


When the change in output is proportional to the change in inputs, it exhibits constant returns to scale.

Constant returns to scale


The constant returns to scale are attributed to the limits of the economies of scale. With expansion in the scale of production, economies arise from such factors as indivisibility of fixed factors, greater possibility of specialization of capital and labor, use of labor saving techniques of production, etc.

The three laws of returns to scale are now explained with the help of a graph below

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