Diminishing Marginal Utility: Definition & Examples
Introduction
The concept of diminishing marginal utility is a fundamental principle in economics that explains consumer behavior. It plays a crucial role in understanding how individuals make decisions about the consumption of goods and services. This law highlights the relationship between the quantity of a good consumed and the satisfaction derived from it.
Definition
The law of diminishing marginal utility states that as a person consumes additional units of a particular good, the satisfaction (
Read MoreMicroeconomics Key Concepts: Definitions, Costs, and Market Structures
Microeconomics: Key Concepts and Principles
Effective altruism: Doing the most good you can possibly do for society with limited resources (time and money). Opportunity cost: The cost of choosing one alternative over another, calculated as the value of the opportunity that is given up as a result of the choice. Absolute advantage: Fewer resources. Comparative advantage: Lower opportunity cost. Normal good: Increased demand when income increases. Inferior good: Decreased demand when income decreases.
Read MoreDemand & Supply: Factors Influencing Market Dynamics
Factors Affecting Demand
1. Income: Changes in consumer income influence the quantity demanded. However, the effect varies depending on whether a good is normal or inferior.
- Normal Goods: An increase in income leads to an increase in the quantity demanded. Conversely, a decrease in income leads to a decrease in the quantity demanded.
- Inferior Goods: An increase in income leads to a decrease in the quantity demanded. Conversely, a decrease in income leads to an increase in the quantity demanded.
2. Price
Read MoreEconomics: Key Concepts of Supply and Demand
Key Concepts in Economics: Supply and Demand
Ceteris Paribus:
When changing one variable in a function (e.g., demand for some product), we assume everything else is held constant.
Demand:
The relationship between the price of a certain good or service and the quantity of that good or service someone is willing and able to buy.
Demand Curve:
A graphic representation of the relationship between price and quantity demanded of a certain good or service, with price on the vertical axis and quantity on the
Read MoreEssential Principles of Microeconomics and Macroeconomics
Macroeconomics vs. Microeconomics
Macroeconomics examines the behavior of the whole economy, while Microeconomics focuses on individual consumers and firms.
Fundamental Economic Questions: WHAT-HOW-WHO?
Adam Smith introduced the concept of the “invisible hand” in markets. Market failures can arise from government intervention, among other reasons.
Profit = Revenue – Cost
Efficiency vs. Equity
- Efficiency is concerned with the optimal production and allocation of resources, given existing factors of production.
Monopolistic Competition: Features & Differentiation
Monopolistic Competition: Features and Differentiation
As the term suggests, monopolistic competition is a market structure that combines characteristics of both monopoly and perfect competition. Because each company offers a slightly different product, it is, in a way, a monopoly: it faces a downward-sloping demand curve and possesses some market power, i.e., a certain ability to set the price of its product. However, unlike a pure monopoly, a firm in monopolistic competition faces competition:
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