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Uyility Theories

In: Business and Management

Submitted By makxx
Words 4743
Pages 19
Contents
Utility before 1920’s 2
Utility measurements 2
CARDINALIST AND ORDINALIST UTILITY APPROACH OF CONSUMER BEHAVIOUR 3
CARDINALIST UTILITY APPROACH 3
Marginal utility 4
Assumptions of Cardinal Utility Analysis: 5
Cardinal Measurement of Utility 5
Rationality 6
Diminishing marginal utility 6
ORDINALIST UTILITY APPROACH 7
Rational behavior of the consumer 8
Ordinal Utility 8
Diminishing marginal rate of substitution 8
Consistency selection 8
Transitivity/Consumer’s preference is not self-contradictory 8
Goods consumed are substitutable 9
ECONOMIES AND DISECONOMIES OF SCALE 16
ECONOMIES OF SCALE 16
Definition: 16
Internal economies of scale 16
External economies of scale 18
DISECONOMIES OF SCALE 20
Internal diseconomies of scale 20
External diseconomies of scale 21
CONCLUSION 22

INTRODUCTION

Utility before 1920’s: One reason why utility theory was not of great significance is explained by the “ Paradox Value” by economist/philosopher Adam Smith in 1800’s. Also known as Diamond-Water Paradox, it addressed why absolute necessities such as water are valued (priced) so cheaply, while frivolities like diamonds are highly valued and command outrageous prices.

Many economists then thought utility was not the cause of price and therefore concentrated on cost of production as the explanation of price.It was until economist Jevons (1871), established how the paradox value could be resolved by associating price with degree of utility, that is marginal utility(extra satisfaction of want and needs from consuming one additional good) and not total utility (the overall satisfaction of wants and needs from consuming a good). Atkinson, L.C. (1982). Utility measurements:
According to Atkinson, L.C. (1982). Individuals wish to have all the things they want which are unlimited but they are limited by scarcity of resources and their income,...

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