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Showing posts from July, 2023

Ordinal Utility Analysis

Unlike the Cardinal utility analysis, which measures utility by numbers, ordinal utility analysis compares utility across different goods and services. Under ordinal utility analysis, utility can't be measured in numbers but compared. So, instead of saying that an orange gives 6 utils and an apple gives 3 utils of utility, we say that an orange gives more utility to the consumer than an apple. Ordinal utility analysis gives rise to the concept of indifference curve.  Indifference curve depicts the different combinations of two goods which gives the consumer the same level of satisfaction. 

Nominal vs Real GDP

  Nominal GDP As we know GDP is the market value of the total output produced in the economy. So, if two goods are produced in the economy- good A and good B in the year 2023, and P A and P B be their respective prices for the year 2023. So, the total GDP produced in the country is  Good A x Price of A + Good B x Price of B Or in general terms, GDP = Q x P The GDP calculated this way is also called Nominal GDP or GDP at current prices. Here, prices of the current accounting year are taken into consideration while computing the GDP.  Nominal GDP can increase with an increase in quantity or prices or both. When the output of the nation remains same but the price level increases, the nominal GDP increases. However, this increase in GDP doesn't show an increase in the flow of goods and services in the nation i.e this type of GDP increase is not accompanied by an increase in production in the nation, but only an increase in prices.  Real GDP  Real GDP  measures the value of goods and s

Consumer Equilibrium using Marginal Utility in Case of Multiple Commodities

Consumer equilibrium is at a point where the Marginal Utility (in terms of money) derived from the last unit of the commodity consumed equals price of that unit. In the above equilibrium, the consumer is consuming a single commodity X. In real life, consumers consume numerous goods and services. So, how can equilibrium be established for many commodities consumed by the consumer ? To find the equilibrium we will consider the equilibrium in case of two commodities.  Consumer's Equilibrium in case of Two Commodities Let us assume that the consumer consumes two commodities - commodity X and commodity Y. For commodity X, consumer reaches the equilibrium when      MU X /MU M = P X     or MU X /P X = MU M                                            (i)                                   Similarly, for commodity Y, consumer reaches the equilibrium when For two commodity case the consumer reaches an equilibrium when MU Y /MU M  = P Y     or MU Y /P Y = MU M                                

Consumer's Equilibrium using Marginal Utility Analysis

The Law of Diminishing Marginal Utility It has been observed that the desire to consume a commodity decreases as more and more units of that commodity are consumed. Therefore, every successive unit of the commodity consumed provides lesser utility than before. The Law of Diminishing Marginal Utility states that as more and more units of a commodity are consumed, the Marginal Utility derived from every successive unit of the commodity declines.  This happens because psychologically, as a consumer starts to consume one unit of the good after another, the the consumers satisfaction reaches a saturation point. So, with every successive unit consumed, the additional utility the consumer derives goes on declining.  Consumer's Equilibrium using Marginal Utility: Cardinal Analysis Consumer's equilibrium is that level of consumption at which the consumer is getting maximum satisfaction (benefit) while spending out of his given income across different goods and services, and has no tende