Economics

Definition: There are certain situations where the law of demand does not apply or becomes ineffective, i.e. with a fall in the price the demand falls and with the rise in price the demand rises are called as the exceptions to the law of demand. Exceptions to the Law of Demand   Giffen Goods: Giffen goods are the inferior goods whose demand increases with the … [Read more...] about Exceptions to the Law of Demand

Definition: The Law of Demand explains the downward slope of the demand curve, which posits that as the price falls the quantity demanded increases and as the price rise, the quantity demanded decreases, other things remaining unchanged. There are several factors that explain why the demand curve slopes downward or why the law of demand showing an inverse relation between … [Read more...] about Reasons for Law of Demand

Definition: The Budget Line, also called as Budget Constraint shows all the combinations of two commodities that a consumer can afford at given market prices and within the particular income level. We know that the higher the indifference curve, the higher is the utility, and thus, utility maximizing consumer will strive to reach the highest possible Indifference curve. But, … [Read more...] about Budget Line

Definition: The Marginal Rate of Substitution refers to the rate at which the consumer substitutes one commodity for another in such a way that the total utility (satisfaction) remains the same. In other words, the marginal rate of substitution between two commodities, let's say X and Y can be defined as the quantity of X required to replace one unit of Y or quantity of Y … [Read more...] about Marginal Rate of Substitution

Definition: The Indifference Map is the graphical representation of two or more indifference curves showing the several combinations of different quantities of commodities, which consumer consumes, given his income and the market price of goods and services. The consumer preferences give rise to several combinations of commodities, each yielding the same level of … [Read more...] about Indifference Map

Definition: The Ordinal Approach to Consumer Equilibrium asserts that the consumer is said to have attained equilibrium when he maximizes his total utility (satisfaction) for the given level of his income and the existing prices of goods and services. The ordinal approach defines two conditions of consumer equilibrium: Necessary or First Order Condition and Supplementary or … [Read more...] about Ordinal Approach to Consumer Equilibrium

Definition: The Ordinal Utility approach is based on the fact that the utility of a commodity cannot be measured in absolute quantity, but however, it will be possible for a consumer to tell subjectively whether the commodity derives more or less or equal satisfaction when compared to another. The modern economists have discarded the concept of cardinal utility and instead … [Read more...] about Ordinal Utility

Definition: The Cardinal approach to Consumer Equilibrium posits that the consumer reaches his equilibrium when he derives the maximum satisfaction for given resources (money) and other conditions. A consumer is said to be highly satisfied when he allocates his expenditure in such a way that the last unit of money spent on each commodity yields the same level of utility. The … [Read more...] about Cardinal Approach to Consumer Equilibrium

Definition: The Cardinal Utility approach is propounded by neo-classical economists, who believe that utility is measurable, and the customer can express his satisfaction in cardinal or quantitative numbers, such as 1,2,3, and so on. The neo-classical economist developed the theory of consumption based on the assumption that utility is measurable and can be expressed … [Read more...] about Cardinal Utility

Definition: The Law of Diminishing Marginal Utility states that with the increased consumption of the commodity, the satisfaction derived from each successive unit goes on diminishing. Assumptions of Law of Diminishing Marginal Utility   The law is said to hold true under certain conditions, and these conditions are referred to as the assumptions of the law of … [Read more...] about Assumptions of Law of Diminishing Marginal Utility