Consumers Equilibrium and Demand Test - 8

The marginal rate of substitution (MRS) is the rate at which a consumer can give up some amount of one good in exchange for another good while maintaining the same level of utility. At equilibrium consumption levels (assuming no externalities), marginal rates of substitution are identical.

With a downward-sloping demand curve, price and quantity demanded move in opposite directions, so the price elasticity of demand is always negative. A positive percentage change in price implies a negative percentage change in quantity demanded, and vice versa.

The Law of Demand is a fundamental principle in microeconomics that states that, all else being equal, as the price of a good or service increases, the quantity demanded for that good or service decreases.

Consumer surplus is a measure of the welfare that people gain from consuming goods and services. Consumer surplus is defined as the difference between the total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually do pay. As per Alferd marshall, CS can not be calculated for luxary goods, inferior goods and necessities.

Marginal utility is rate of change of total utility with respect to consumption of a commodity. So it is an addition to total utility resulting from a unit change in total utility.

Average utility is calculated by dividing the total utility by the number of units consumed. Therefore, average utility represents the average satisfaction or benefit per unit of the good or service consumed.

So, when the total utility is divided by the number of units consumed, it gives us the average utility.

When the income elasticity of demand is greater than unity, it implies that the demand for the commodity increases more than proportionally to a change in income. In such cases, the commodity is typically considered a luxury. Luxury goods are those for which demand increases significantly as income rises, indicating that consumers allocate a larger portion of their income to these items when they have more purchasing power.

When the price of a good increases, the demand for its substitute often increases because consumers switch to the substitute due to the higher price of the original good.

The falling shape on the right side of the demand curve is due to the law of diminishing marginal utility. According to this law, as a consumer consumes more units of a good, the additional satisfaction or utility derived from each successive unit decreases. This means that the marginal utility, or the extra satisfaction obtained from consuming one more unit, diminishes as consumption increases. Consequently, consumers are willing to pay less for additional units, leading to a downward-sloping demand curve.

Monotonicity of preferences in economics implies that consumers always prefer more of a good to less. In other words, if a consumer is given two bundles of goods, they will always prefer the bundle that gives them the maximum satisfaction or utility. This is because rational consumers aim to maximize their satisfaction or utility from the goods and services they consume. Therefore, monotonicity of preferences ensures that consumers' choices are consistent with their goal of maximizing utility, leading them to prefer bundles that offer higher satisfaction over those that offer lower satisfaction.