relationship of price and utility
The document discusses the relationship between price and utility for consumers. It explains that a consumer's willingness to pay decreases for each additional unit of a commodity as the marginal utility declines. The consumer will purchase units as long as the marginal utility is greater than the price, and will stop purchasing once the marginal utility and price become equal. This is illustrated in a table showing marginal utility decreasing for each additional unit while price remains constant, with consumption stopping at the point where marginal utility and price are equal. A second document defines consumer surplus as the difference between what consumers are willing to pay versus what they actually pay, which occurs when willingness to pay is greater than the market price.
relationship of price and utility
- 1. Relationship of Price and Utility S.A. Qureshi
- 2. Price and Utility The price that a consumer is willing to pay for a commodity depends on the MU he expects to derive from it. Therefore, for initial units he will be willing to pay more and for the later units he will pay less. Therefore, as long as the MU derived is greater than the price, the consumer will go on consuming it. The consumer stops at a point where his MU is equal to price. Beyond this point his MU is less than price and, therefore, he will be the loser.
- 3. Price and Utility Units of Consumption MU Price MU of Money Comparison 1 50 10 50 MU>Price 2 40 10 40 MU>Price 3 30 10 30 MU>Price 4 20 10 20 MU>Price 5 10 10 10 MU=Price 6 5 10 5 MU<Price
- 4. Consumer Surplus Consumer surplus is an economic measure of consumer benefit. It is calculated by analysing the difference between what consumers are willing to pay and what they actually pay for the good or service. A consumer surplus occurs when the consumer is willing to pay more for a given product than the current market price.
- 5. Consumer Surplus MU 50 40 30 20 10 MU curve05 Market Price Consumer Surplus 0 1 2 3 4 5 6
- 6. Relationship of Price and Utility S.A. Qureshi