Principles of Microeconomics - Essay Example

However, it is observed that the marginal utility tends to diminish as you consume more of the goods (Investopedia ULC). There are two limits observed in the determination of utility; the limit beyond which the marginal utility begins to decline and the other limit shows that beyond which the utility becomes negative. The second limit works like a satiation point for the consumer so that an additional consumption of the product will bring displeasure instead. Generally, this decline in utility is called the "diminishing marginal utility".

It is through this law of diminishing marginal utility that the economists were able to understand the law of demand and the negatively sloping demand curve (Investopedia ULC). It basically equates to the understanding that the less you have of a product the higher is your marginal utility that's why the willingness to pay (the price) is also high. On the other end, as the product increases the marginal utility declines, therefore the willingness to pay also diminishes. Answer to #3. Income is generally accepted as a determinant of demand which moves on the same direction.

However, there are products which show the opposite response. We call them the inferior good, as opposed to the normal good. The demand for "normal good" increases as income increases, such as clothing and food. On the other hand, we have products in which the demand for such declines as income increases. A classic example of this is a bus ride. This is so because when people get more income, they may opt to buy their own cars. There is also what we call "related goods". Related goods can be "substitutes" or "complements".

"Substitutes" are products in which the demand for one increases as the price of the other increases. This is because consumers will shift from the product whose price increases to the product whose price remained. On the other hand, complements are those whose demand for one product decreases as the price of the other increases. This is because as complements they are consumed together. Lastly, "giffen good" is one which people consume more of as price rises, which apparently violates the law of demand (Wikimedia Foundation, Inc., 2009). This happens due to the absence of substitute, giving way to the dominance of the income effect leading more people to buy more goods even as its price arise (Wikimedia Foundation, Inc., 2009). Answer to #4.

Generally, the supply curve is observed to be upward sloping, adhering to the law of supply stating that as the price of the goods increases, more will be supplied of it. However, in some cases, we see the supply curve come to a point of downward slope rather than continuously sloping upward. There are two cases mentioned when this thing happen. First is the supply of labor with respect to the (real) wage rate. The real wage serves as a price to labor and a cost to leisure. Therefore as the law of supply suggests, an increase in the price of labor should be followed by a greater quantity supplied.

This is also supported by the logic that given that the cost of leisure is now higher, the substitution effec