Diminishing marginal utility means that the amount of marginal utility
decreases as more of a good is consumed. It is assumed that one's
enjoyment of the good decreases as more and more of it is used.
Price elasticity of demand: "a measure of the extent to which quantity
demanded responds to a price change. The elasticity coefficient...is
percentage change in quantity demanded divided by percentage change in
price." (Page 744)
Inferior good: "a good whose consumption goes down as income rises." (Page 739)
"Consider this illustration of an inferior good. When Duncan Thurly
first reached adulthood many years ago, he eeked out a living working
at minimum wage jobs. His income was quite limited in those early lean
years. When it came to demanding clothing, the best he could afford
was denim blue jeans and white T-shirts. Khaki slacks and turtleneck
sweaters were more to his liking, but beyond his financial reach.
However, once Duncan worked his way up the occupational ladder and his
income increased, he was inclined to modify his wardrobe. He purchased
nothing but khaki slacks and turtleneck sweaters. As such, he no
longer found the need for denim blue jeans and white T-shirts. His
demand for denim blue jeans and white T-shirts decreased with his
additional income. For Duncan, denim blue jeans and white T-shirts are
inferior goods."
http://www.amosweb.com/cgi-bin/wpd.pl?fcd=dsp&key=inferior+good
"Inferior Good" AmosWeb Encyclonomic Webpedia
Example of negative marginal utility:
"As long as one of the things we can do with oranges is throw them
away, we cannot be worse off having more oranges; so oranges cannot be
a bad. If it were costly to dispose of oranges (imagine yourself
buried in a pile of them), then at some point the marginal utility of
an additional orange would become negative--you would prefer fewer to
more. Figure 4-2 shows your total and marginal utility for oranges as
a function of the quantity of oranges you are consuming, on the
assumption that it is costly to dispose of oranges. Total utility and
marginal utility of oranges, assuming that it is costly to dispose of
them. I want to eat only 10 oranges, so additional oranges have
negative marginal utility. Total utility falls as the number of
oranges increases beyond 10."
http://www.daviddfriedman.com/Academic/Price_Theory/PThy_Chapter_4/PThy_Chapter_4.html
"Chapter 4: The Consumer: Marginal Value, Marginal Utility, and
Consumer Surplus" by David Friedman
Example of increasing marginal utility:
"Someone who is risk loving has an increasing marginal utility of
income. Each additional $1 earned provides more additional utility
than the last."
http://core.ecu.edu/econ/whiteheadj/5000/ch07/eu.htm "Decision Making
Under Uncertainty"
Utility is maximized if MU1/P1=MU2/P2 because the marginal utility of
the last dollar spent on the first good is exactly the same as the
marginal utility of the last dollar spent on the second good. If the
two quantities were not equal, the consumer would spend more money on
one of the goods and less money on the other until the law of
diminishing marginal utility drove down its marginal utility to
equality with that of the other good.
A preference is well behaved if it is monotonic and convex.
"Monotonicity: more of any commodity is always preferred (i.e.each and
every commodity is a good)." "Convexity: mixtures of bundles are (at
least weakly) preferred to the bundles themselves."
www.econ.ucsb.edu/~tedb/Courses/ Ec100AF99/Ch3/sld038.htm
""Well-Behaved Preferences"
Page references above refer to "Economics" 14th edition by Samuelson
and Nordhaus, McGraw-Hill Inc., 1992
Sincerely,
Wonko |
