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Mahatma Joytiba Phule Rohilkhand University
Lecture Notes
Managerial Economics
6.5 CHARACTERISTICS OF CARDINAL mileage ANALYSIS
- Rationality The consumer is assumed to the rational. He tries to maximize his total mileage under the income constraint.
- Cardinal Utility The mileage of each commodity is measurable. mileage is cardinal conception. The most accessible measure is plutocrat. therefore mileage can be measured quantitatively in financial units or cardinal units.
- Constant Borderline mileage of plutocrat The mileage deduced from goods are measured in terms of plutocrat. So, plutocrat is a unit of dimension in cardinal approach. Hence, borderline mileage of plutocrat should be constant.
- dwindling Borderline mileage still, each fresh If the stock of goods increases with theconsumer.stock or unit of the commodity gives him less and less satisfaction. It means mileage increases at a dwindling rate.
- Independent serviceability
It means mileage attained from commodity X isn't dependent on mileage attained from commodity Y. It doesn't affected by the consumption of other goods. LAW OF dwindling Borderline mileage An important tenet of cardinal mileage analysis relates to the geste of borderline mileage. This familiar geste of borderline mileage has been stated in the Law of dwindling Borderline mileage according to which borderline mileage of a good diminishes as an individual consumes further units of a good. In other words, as a consumer takes further units of a good, the redundant mileage or satisfaction that he derives from an redundant unit of the good goes on falling. It should be precisely noted that it's the borderline mileage and not the total mileage that declines with the increase in the consumption of a good. The law of dwindling borderline mileage means that the total mileage increases at a dwindling rate. Marshall who has been a notorious exponent of the cardinal mileage analysis has stated the law of dwindling borderline mileage as follows “ The fresh benefit which a person derives from a given increase of his stock of a thing diminishes with every increase in the stock that he formerly has. ” This law is grounded upon two important data. First, while the aggregate wants of a man are nearly unlimited, each single want is insatiable. thus, as an individual consumes further and further units of a good, intensity of his want for the good goes on falling and a point is reached where the individual no longer wants any more units of the good. That is, when achromatism point is reached, borderline mileage of a good becomes zero. Zero borderline mileage of a good implies that the existent has
rather than positive satisfaction. thus, the volume Q of the commodity is called satisfaction volume or malnutrition point. Thirdly, the increase in the volume consumed of the good per period by the consumer beyond the satisfaction point has an adverse effect on his total mileage that is, his total mileage declines if further than Q volume of the good is consumed. This means beyond Q borderline mileage of the commodity for the consumer becomes negative advertisements will be seen from the lower panel of Figure7.1 beyond the satisfaction point Q borderline mileage wind MU goes below theX-axis indicating it becomes negative beyond volume Q per period of the commodity consumed. It's important to understand how we've drawn the borderline mileage wind. As stated above borderline mileage is the increase in total mileage of the consumer caused by the consumption of an fresh unit of the commodity per period. We can directly find out the borderline mileage of the consecutive units of the commodity consumed by measuring the fresh mileage which a consumer obtains from consecutive units of the commodity and conniving them against their separate amounts. still, in terms of math, borderline mileage of a commodity X is the pitch of the total mileage function U = f( Qx
. therefore, we can decide the borderline mileage wind by measuring the pitch at colorful points of the total mileage wind TU in the upper
panel of Figure7.1 by drawing excursions at them. For case, at the volume Q borderline mileage( i.e. dU/ dQ = MU is set up out by drawing digression at point A and measuring its pitch which is also colluded against volume in the lower panel of Figure7.1. In the lower panel we measure borderline mileage of the commodity on the Y- axis. Likewise, at volume Q borderline mileage of the commodity has been attained by measuring pitch of the total mileage wind TU at point B and conniving it in the lower panel against the volume Q It'll be seen from the figure that at Q of the commodity consumed, the total mileage reaches at the maximum positionT. thus, at volume Q the pitch of the total mileage wind is zero at this point. Beyond the volume Q the total mileage declines and borderline mileage becomes negative. therefore, volume Q of the commodity represents the satisfaction volume. Another important relationship between total mileage and borderline mileage is worth noting. At any volume of a commodity consumed the total mileage is the sum of the borderline serviceability. For illustration, if borderline mileage of the first, alternate, and third units of the commodity consumed are 15, 12, and 8 units, the total mileage attained from these three units of consumption of the commodity must equals 35 units( 15 12 8 = 35).
man can satisfy all his material wants if he possesses enough plutocrat. Since man’s total wants are virtually unlimited, thus, the borderline mileage of plutocrat to him noway falls to zero. The borderline mileage analysis has a good number of uses and operations in both profitable proposition and policy. The conception of borderline mileage is of pivotal significance in explaining determination of the prices of goods. The discovery of the conception of borderline mileage has helped us to explain the incongruity of value which troubled Adam Smith in “ The Wealth of Nations. ” Adam Smith was greatly surprised to know why water which is so veritably essential and useful to life has such a low price( indeed no price), while diamonds which are relatively gratuitous, have such a high price. He couldn't resolve this water- diamond incongruity. But ultramodern economists can break it with the aid of the conception of borderline mileage. According to the ultramodern economists, the total mileage of a commodity does not determine the price of a commodity and it's the borderline mileage which is crucially important determinant of price. Now, the water is available in abundant amounts so that its relative borderline mileage is veritably low or indeed zero. thus, its price is low or zero. On the other hand, the diamonds are scarce and thus their relative borderline mileage is relatively high and this is the reason why their prices are high. Samuelson explains this incongruity of value in the following words The further there's of a commodity, the lower the relative advisability of its last little unit becomes, indeed though its total utility grows as we get further of the commodity. So, it's egregious why a large quantum of water has a low price or why air is actually a free good despite its vast utility. The numerous after units pull down the request value of all units.
Besides, the Marshallian conception of consumer’s fat is grounded on the principle of dwindling borderline mileage
