What is Economics ?

Economics is the science of choice in the face of

unlimited ends and scarce resources that have
alternative uses.

Since resources are scarce and the uses to

which they can be put to are unlimited, one is
required to choose the best amongst the
available alternatives.
Several thinkers have given different
definitions of economics.

According to Alfred Marshall, economics is

the study of mans actions in the ordinary
business of life, it enquires as to how he
gets his income and how he utilises it.

Thus on the one hand it is the study of

wealth, on the other it is the study of man.
• According to Lionel Robbins, economics
studies human behaviour as a relationship
between unlimited ends and scarce
means, which have alternative uses.

• Thus, Robbins says that, economics can

help a man to choose how to make use of
his scarce means for the maximum
satisfaction of his unlimited ends.
It was J.M.Keynes who pointed out that
economics also dealt with issues
concerning the nation as a whole.

Keynes defined economics as the study

of administration of scarce resources
and of the determinants of
employment, income and growth.
• micro-economics studies the behavior of an
individual decision-making economic unit like a
firm, a consumer, or an individual supplier of
some factor of production

• In simple terms, managerial economics is

applied micro-economics. It is an application of
that part of micro-economics, which is directly
related to decision making by a manager.
 True or False

According to Marshall, economics

is primarily concerned with the
study of wealth.
 True or False
The modern view hold economics as
being composed of price, income,
employment and growth theories
 Circular Flow of Economic Activities
• Economic analysis attempts to explain the working of
economic systems.
• Assume a simple economic system consisting of two
sectors, whose activities are systematically connected
with one another. The economic activities performed
by economic agents are generally classified into three
inter-related activities:

• a) Supplying factor inputs, like land, labour, capital,

organisation and enterprise, which enable the agents
to earn incomes which in turn could be used for
purchasing consumable goods;
• (b) Using the factor inputs (raw materials,
machines, labour, land, etc.) for producing
goods to be supplied to the consumers; and

• (c) Providing intangible and specialized

services directly to the people (example,
lawyers, teachers, doctors, and porters) or
working for the government (example, soldiers,
judges, policemen, etc.).
• The nature and dimensions of economic
activities are generally determined by the extent
of overall economic development.

• For instance, a developed economic system

like that of the United States or Japan, has
more specialized activities and division of
labour, as compared to a traditional economic
system
• Forms of Organisation
• In modern times, organisation of business assume
several forms, viz., sole proprietorship, individual
entrepreneur or one-man business, partnership, joint–
stock companies, industrial combination, co-operative
enterprises and State enterprises.

• a) Individual Entrepreneur: Under the ‘one-man’

concern, organiser invests his/her own capital and
may also borrow some.
• He/she rents a shop and employs a worker, if
necessary. He/she personally make purchases and
attends to the sales, and is also the owner manager,
who also takes the entire risks.
• Thus, an entrepreneur organizes, directs all economic
activity and takes the full risks, and is the sole
proprietor.
• b)Partnership: In partnership firm, two,
three or more people join together,
contribute capital, and share the profits
and risks of losses in agreed proportions.

• c) Joint-stock company: It is the most

important type of business organisation
today. It overcomes the disadvantages of
the artnership arising out of small
financial resources and limited business
talent.
• Co-operative enterprise:
• They are of two types –
• 1) producer’s cooperation, and
• 2) consumer’s cooperation.

• i) Producers cooperation: Under it, the workers take

up the entrepreneurial work, They contribute some
capital and borrow the rest; elect their own foreman
and managers and employ other staff. After all
expenses on rent, capital, salaries and wages, the
profits are divided by the workers.
• This type of co-operation is called the productive co-
operation or producer’s co-operation.
• ii) Consumer’s cooperation: Under it, the
consumers of a region contribute small
shares of capital and start a store. These
co-operative stores buy goods from
wholesalers or, and sells them to the
members at the market price.

• The profits are shared by the members in

proportion to their purchases or,
commonly, in proportion to their capital
share. Usually, the capital share is
contributed equally and therefore profits
are, also equally shared by the members.
• State enterprise: The organisation of state
enterprise is similar to that of the private
enterprises with consisting of general manager,
foremen, works manager, accountants,
treasurer, departmental heads, etc.

• Its working is generally similar to that of a joint-

stock company. But, the fundamental difference
is that all its employees are government
servants with fixed tenure and pension benefits
on retirement. The capital comes from the state
revenue, which are attributed by the tax-payers.
Therefore, the profits, if any, go to the state.
• Public enterprises: Public enterprises may be
in the form of
• i) Departments, i.e., run by a government
department, e.g., railways and posts and
telegraph in India,

• ii) Corporation, e.g., Life Insurance Corporation

of India established by a special Act of
Parliament, and

• iii) Limited Liability Company registered under

the Companies Act.
• 3. Scope.
• (a) Microeconomics – the study of individual
economic behavior where resources are costly,
e.g., how consumers respond to changes in
prices and income, how businesses decide on
employment and sales, voters’ behavior and
setting of tax policy.
• (b) Macroeconomics – the study of aggregate
economic variables directly (as opposed to the
aggregation of individual consumers and
businesses), e.g., issues relating to interest and
exchange rates, inflation, unemployment, import
and export policies
 Concept of Slope
• The concept of slope is important in economics
because it is used to measure the rate at which
changes are taking place. Economists often look
at how things change and about how one item
changes in response to a change in another
item.
• It may show for example how demand changes
when price changes or how consumption
changes when income changes or how quickly
sales are growing.
• Slope measures the rate of change in the
dependent variable as the independent variable
changes. The greater the slope the steeper the
line.
 Profit Maximisation
A majority of the organisations regard profit
maximisation as the sole criteria for their
existence.

The primary motivation of such organisation is to

increase profits…ex (colgate, Britannia) (Titan)

Maximising profits involves maximising revenues

while simultaneously minimising costs.
Thus, any managerial decision which is able to
increase revenue without a proportionate rise
in costs or can reduce costs without a fall in
revenue, will increase profits.

Profit maximisation in its most lucid connotation

means the generation of the largest absolute
amount of profits over the time period being
analysed – short – or long-run While short run
is the period where at least one factor of
production is constant, in the long-run all the
factors are variable.
A company ability to control its costs varies
depending on the time it has to react. As the
time increases, the proportion of variable costs
also increases.

In the short-run some costs are fixed but in the

long run , all costs are variable. The company
must recover all its fixed costs whether or not it
produces any output.

It should continue producing the output , if it can

sell it at a price that covers the additional
variable cost that it will have to incur for
production.
• A printing operator operating one printing press
on a one year lease. He employs three workers
on a one-day contract.

• While the one year lease rental for the press is

Rs.50,000. Each worker must be paid Rs.80
per day. The cost of paper, ink, electricity and
other miscellaneous expenses for printing one
book is Rs.100. On any given day, besides the
cost of the press, the cost of the workers is also
fixed since they have already been employed.
For the following day, the cost of the press remains fixed
but the wage cost of the workers is variable, as the
one-day contract can be allowed to lapse.

Similarly for the following year, all the costs of the printer
become variable since then the printer has the option
of not renewing the lease on the press and not
employing any worker either.

Now, suppose the printer receives an order in the short

–run , for printing books worth Rs.400. This will be
sufficient to cover costs of the worker the raw material
and miscellaneous expenses and also contribute
Rs.60 to the fixed overheads, which have to be paid
regardless of the order.
In this case, the printer should accept the order.

If however, the worth of a day’s job is less than that of Rs.340,

then the printer should not take up the order, since he will be
better off not hiring any worker or spending on raw material
and other expenses and letting his press remain idle.

In the long-run , in this case in a year, all the printers costs are
variable.

Therefore, he should get out of the business unless he expects

to generate enough revenue to cover the costs of the printing
press, workers, raw material, other expenses and the capital
involved in the business
In the short-run , a firm can only produce more
output by working on its fixed factor harder.

In our example, if the printer were to receive a

huge order to be completed the next day,
there would not be enough time to increase
the number of presses.

The only way to meet the new demand would

be by increasing the number of workers.
In the long-run, however, the firm can alter
both- the fixed factor and technology.
• A firms choice of technology will determine the
cost of production for different levels of output.

• Besides, achieving the lowest unit cost for any

given level of production, the other aim of profit
maximization is to earn the highest possible
revenues.

• The extent of profits for a given level of costs

depend upon the revenues that a firm can
achieve, which in turn is a function of the
consumers willingness to pay for a particular
product.
How much a consumer is willing to pay will
depend on his income, tastes and also on the
price of related goods.

The maximum price that a consumer is willing to

pay for one more unit of a particular good is
known as the reservation price.

A firm must price its product in such a way that

the nth ranked consumer pays just this
reservation price for the nth unit of the output.
Given a choice, any firm would want to charge the
reservation price from every consumer. But this
seems unlikely because it can usually charge
only a single price for all the output it sells.

Thus in order to sell to the nth consumer , it must

sell to the n-1 consumers at a price below what
they will actually be willing to pay.

In other words, if a firm lowers its price to expand

its market by one additional consumer, it loses
the value of price reduction to the last customer.

The net of these two values is known as the

marginal revenue.
It represents the change in total revenue
due to the sale of one additional unit.

While each additional unit brings in

additional revenue, it also increases the
firm’s cost. This increase in the total cost
due to the sale of one additional unit is
known as marginal cost.
• Marginal revenue is the increase in
revenue from selling one more unit of a
product. It differs from the price of the
product because it takes into account the
effect of changes in price.
• For example if you can sell 10 units at
Rs.20 each or 11 units at Rs.19 each, then
your marginal revenue from the eleventh
unit is (10 × 20) - (11 × 19) = Rs.9.
The concept is important in microeconomics
because a firm's optimal output (most
profitable) is where its marginal revenue
equals its marginal cost: i.e. as long as the
extra revenue from selling one more unit is
greater than the extra cost of making it, it
is profitable to do so.
Ideally, the firm must choose a price-output
combination that yields the highest revenue at
lowest cost, for maximising profits.

As long as the marginal revenue exceeds the

marginal cost, it will be worthwhile to add that
extra customer as then the overall profit will
increase.

Once the marginal cost equals the marginal

revenue, the last consumer makes no
additional contribution to the profits of the firm.
Basic concepts of economics

The three most vital concepts are – opportunity

cost, marginal analysis and discounting.
 OPPORTUNITY COST
Opportunity cost of a decision is the cost of
sacrificing the alternatives to that decision.

The question of sacrificing arises because of the

fundamental economic problem of scarce
resources which forces the manager to choose
the best out of the available alternatives.

Choosing the best automatically means leaving

behind all the remaining alternatives.
Opportunity cost confronts us at every point in
life. But, most of the times, we don’t take this
cost into account when making decisions.

For example, a shoemaker making chappals

instead of shoes and sandals.

Even when a person decides to invest his money

in the debenture of a company, he compares
the returns on his investment with what he
could have earned if this money was kept in a
bank as fixed deposit.
 Marginal Analysis
• Economists look at how costs and benefits change as there are
small changes in actions.  We call this marginal analysis, and it
is perhaps the key concept in economic analysis.

• Marginal Analysis is concerned with finding out the change in

the total arising because of one additional unit.

• In any case, be it a firm deciding whether or not to expand

production, a student deciding if another beer is a good idea, or
a professor choosing to give an extra exam, optimal
performance requires that benefits and costs be equilibrated on
the margin.

• What this means is that if the additional benefit exceeds the

additional cost, take the action. Keep taking it as long as the
benefit exceeds the cost, and to ensure that all excess benefits
(those that exceed costs) are accrued, do it until for the last
action, the benefits just equal the costs.
• The benefits from the last action (such as unit
of production or consumption) are termed
marginal revenue, and the costs from that
action are termed marginal costs

• In 1990, the National Aeronautics and Space

Administration (NASA) launched into orbit the
Hubble Space Telescope, a new orbiting
telescope that by being in space avoided
atmospheric distortions from astronomical
observations. Astronomers expected vast new
gains and insights in their scientific
explorations.
• Unfortunately, someone goofed. While being
tested after being in orbit, scientists and
engineers at NASA discovered some flaws in
the mirrors used in the telescope that
significantly diminished the ability of the
telescope to gather signals from deep space.
The scientists were devastated, but
immediately set upon ways to rectify the
problem. Of course the solution was costly.

• Politicians were outraged, some calling the

Hubble Space Telescope a $2 billion debacle.
There was a strong movement to deny any
more funds to the project, since NASA had not
gotten it right initially. But marginal analysis
reveals a much different perspective.
The $2 billion or so dollars already spent on the Hubble
Telescope did not matter. What was relevant at that
point was what were the gains and losses from fixing
the problem or leaving the telescope as it was.

In its flawed state, the Hubble Telescope could still

perform many useful and interesting scientific
functions. Corrected, it could perform more.

The only relevant question at that point was whether or

not the additional scientific discoveries that would
come from fixing the problems would be worth the cost
of the repairs. The initial expenditure to build and
launch the Hubble Space Telescope did not matter
anymore.
Total revenue is the total money received
from the sale of any given quantity of output.
The total revenue is calculated by taking the
price of the sale times the quantity sold, i.e.
total revenue = price X quantity.
• Revenue is the income generated from the
output produced by firms and then sold in
goods markets. It is also known as sales
turnover.

• The revenue the firm can create depends on

the strength of demand for the products they
are supplying - in other words how much output
can be sold at a given price.

• TOTAL REVENUE = Price per unit x Quantity

sold ( TR = p x q)
AVERAGE REVENUE = Total revenue
divided by output

MARGINAL REVENUE = the change in

total revenue as a result of selling one
extra unit of output.
 Discounting Principle

Almost all managerial decisions relate to the

future. The value of money today is not the
same as it will be at a later point of time.
Anything that is received later always
involves an element of risk.

A rupee received today is more valuable

than a rupee that will be received later.
This is known as the time value of money.
Suppose a person is offered a choice to make
between a gift of Rs.100/- today or a Rs.100
next year. Naturally, he will choose Rs.100
today. This is true for two reasons :-

- The future is uncertain and there may be

uncertainty in getting Rs.100/- if the opportunity
is not availed of

- Even if he is sure to receive the gift in future,

today’s Rs.100 can be invested, so as to earn
interest say as 8%, so one year after it will
become RS.108
Demand and Supply

Economics studies how society allocates the

limited resources of the earth to the
insatiable appetites of humans.
Supply and demand are the forces at work.
At what is referred to as the equilibrium
(E), the market price allows the quantity
supplied to equal the quantity demanded.
Suppliers are willing to sell, and consumers
are willing to buy. Supply equals demand
for a price.
That in a nutshell, is the basis of all economic
theory.

For example, lets take a look at the local pub,

Porth Tavern which brews its own beer, spud
beer. Imagine you are a fosters drinker and the
bar is running a 25 cents special discount on
mugs of Spud beer.

The owner has ten kegs on hand, but feels if he

were to charge the usual dollor per mug, he
might be able to sell one or two kegs.
You like Fosters, but at 25 cents you decide to try
the cheaper brew. Here, in this bar, the
“invisible hand” of economics is at work. At the
“right” price, there is a demand for the ten kegs.

supply

Mug price
.25 demand
cents

0 2 4 6 8 10 14 16 18 20
The graph shows that as the price per mug
increases, the brewery would be willing to
produce more , but people would be less willing
to buy.

Generalising from this simple relationship to an

entire economy, aggregate supply (AS) equals
aggregate demand (AD) at an equilibrium price
and level of economic output. The graph is
similar to beet graph, the same relationship
holds, but the elements measured constitute a
much more serious MBA subject.
 AS

Price Level
(P)
P AD

Economic Output (Y)

0 2 4 6 8 10 14 16 18 20
Level of Economics : MICRO OR MACRO

Micro economics deals with the supply and

demand equation of individuals, families,
companies, or industries. The Fosters versus
Spud beer competition was an example of
Micro-economic battle.

Macro-economics , on the other hand, concerns

itself with the economies of cities, countries or
the world as shown in the second graph. Simply
put, “micro” economics deals with “small”,
specific situations; “macro” economics loos at
the “big” picture of entire economies.
 Micro Economics
Micro-economics is less glamorous than
macro-economics, but it is a little more
practical.
Since most of us are not likely to have a
macro-effect on a whole economy , we will
concentrate on a few basic concepts that
make-up micro-economic knowledge.
 Opportunity Costs - Revision
Because our appetite for goods and services
are insatiable, decisions have to be made
to determine how to allocate limited
resources.

Most often, the increase in production of a

good or service requires that a cost or
sacrifice be incurred. Economists call
these costs opportunity costs.
For example, in 1992 the demand for Harley-
Davidson motorcycles had the company’s
factories operating at 100 % of capacity.
Harley controlled 60% of the big-ticket, big-bike
market, and management was forces to decide
how best to allocate limited production capacity
to satisfy demand.
They chose to produce several models for sale in
the United States and abroad.
As a result, Harley Davidson, incurred a
significant opportunity costs because the
company decided not to devote its entire
capacity to its most expensive and profitable
models for export to Japan.
Had Harley tried to maximise short term profits,
it would have risked alienating the domestic
market of devoted bikers – the very group
that helped create the Harley mystique that
the Japanese are buying.

Opportunity cost, therefore, is the cost of

choice, when output, time and money are
limited.
 Marginal Revenue and Cost - revision
A concept closely associated with opportunity
cost is marginal revenue and marginal cost.

Companies are motivated to maximise total

profits by maximising revenues and minimising
costs. If a business has the opportunity to sell
even a single additional unit at a profit, it should
produce it. The Marginal Revenue (MR) from
sale should exceed the marginal cost (MC) to
produce.
Enterprises should continue to produce until their
MR=MC. At that point of equilibrium the
marginal profit on the next unit sold will equal
zero.

No profits are left on the table. Past that level, the

marginal revenue of each additional unit sold
decreases and the marginal cost increases.

Experience tells us that more units businesses try

to push on the market, the less the market is
willing to pay for these goods.
The cost of producing one additional unit is
minimal. But if there is no excess capacity and
a company wants to produce more units, new
workers will need to be hired, new equipment
purchased and a larger factory leased or built.

Therefore, once a factory reaches capacity , the

marginal cost of producing one additional unit
increases beyond the cost of last unit produced.

In the case of a cattle rancher, ram singh, the

marginal cost of adding a sheep to the herd is
minimal. Fences still have to be mended and
the pasture maintained.
Since he is a rational decision market, Ram Singh
will add cattle to the point that the marginal
revenue from the same of an additional sheep
will cover these marginal costs of raising this
sheep. (MR=MC).

If the cost of raising one additional unit becomes

higher than the current market price, then Ram
Singh will stop adding sheep to his herd.
Why the demand curve is flat rather than
downward sloping, as in the case of other
demand curves. It is because the price of meat
is determined in a competitive auction.

The few additional head of cattle that Ram Singh

might bring to the market will not affect the price
that is determined by the output of thousands of
ranchers and meat processors.

But if Ram Singh had a corner on the meat

market , or a monopoly then presumably he
would always produce and sell at the point
where MR=MC.
The marginal cost and revenue concepts would
also hold true for a cookie factory manager
faced with a large special order.

Imagine yourself in his apron. The customer

wants to pay 1.00 Rs. Per dozen for 100
dozens to be sold at the local mela. You have
some excess capacity and so you go to your
Accountant and ask what your cost is to
satisfy this order. She asserts that it would
cost Rs.1.45 per dozen. She gives you this
breakdown as proof.

Cookie Batter Rs.0.80

Labor Rs.0.25
Factory utilities Rs.0.20
Factory upkeep Rs. 0.20
----------
Total cost Rs.1.45
From that information you can see that the only
marginal cost of running the automated cookie
production line is the extra batter.

The machine operator would be there anyway,

and the large oven would be on anyhow. The
factory would continue to require the usual
maintenance.

The factory manager would welcome the order

because he can make a marginal profit.
• As shown in the sheep and cookies examples,
“marginal” costs and revenues are critical in
making “marginal” pricing and production
decisions.

• However, to evaluate profitability of an entire

business , rather than one transaction , total
revenue must exceed total costs to make a
bottom line company profit.
• Before, we analyse demand in order to forecast
it, it is very important to understand the basis of
consumer demand i.e why , when and how
much does the consumer purchase.

• Utility i.e the want satisfying quality of a good or

service, is the prime factor that generates
demand.
• Utility is the terms used to describe the value of
a product to a consumer.
• Marginal Utility (MU) means the usefulness or
utility of having an additional unit of a product.
At some point a buyer is fully satisfied, and an
additional unit is of no value.

• Going back to the beer example, suppose you

are looking to forget whatever troubles you
have and you order one more beer at Port
Tavern. A second beer would be welcome and
infact would be of great Marginal utility. Five
hours later you have had twelve beers, played
bowling, danced and in the process forgotten
your troubles.
At his point, an extra beer would be of little
value.

THE MARGINAL UTILITY OF THE

THIRTEENTH BEER IS NEGLIGIBLE.
 Concept of demand
Demand for a commodity implies
• Desire to acquire it
• Willingness to pay for it
• Ability to pay for it

• Mere desire to buy a product is not

demand. A miser’s desire for this ability to
pay for a car is not demand because he
does not have the willingness to pay for it.
Similarly a poor man’s desire for and his
willingness to pay for a car is not demand
because he lacks the necessary purchasing
power.
One can also conceive of a person who
possesses both the will and purchasing power
to pay for a commodity, yet this is not demand
for that commodity if he does not have desire to
have that commodity.
Demand for a commodity refers to the quantity of
the commodity which an individual household is
willing to purchase per unit of time at a
particular price/
 Types of demand
• Direct and indirect demand

Demand for goods that are directly used for

consumption by the ultimate consumer is
known as direct demand. Demand for all
consumer’s goods such as bread, tea,
readymade shirts, scooters, houses is direct
demand.

Indirect demand is the demand for goods that are

not used by consumer’s directly. They are
used by producers for producing other goods.
Examples of indirect demand are demands for
machines, tools, coal and any raw material.

While direct demand depends primarily upon the

consumer’s income, indirect demand depends
upon the concerned producer’s output.

In the above example, if cloth is a consumer

good, then its demand will depend on the
consumer’s income, while if it is used by a
garment manufacturer, then its demand would
depend for readymade shirts and trousers.
Derived and autonomous demand
The goods whose demand is not tied with the
demand for some other goods are said to have
autonomous demand, while the rest have
derived demand.

Thus, while demand for tyres is derived since it

depends upon the demand for vehicles, the
demand for milk or vegetables is autonomous.

However, since almost all products depend on

others to some extent, the difference between
the two is of more degree.
Durable and Non-durable goods demand

Durable goods are those that can be used more

than once, over a period of time, as against
non-durable goods that can be used only once.
Both producer and consumer goods can be
durable and non-durable.

Durable goods are used while non-durable goods

are consumed. Amoung producer’s goods while
machines, tools, etc are non-durable.
Consumer’s goods such as bread, jam etc are
non-durable while car, readymade garments
are durable.
Firm and Industry Demand

As the name indicates, firm demand is the

demand for the product of a particular firm. On
the other hand , demand for the product of a
particular industry is known as industry
demand.

For example. Demand for pens is an industry

demand, while the demand for Parker pens is a
firm demand. Similarly, demand for Colgate
toothpaste and toothpaste in general are firm
and industry demands respectively.
• Total Market and Market Segment Demand.

• Demand analysis requires not only the total

demand for a product but also a break-up of the
demand for the product in different parts of the
market.

• The market may be segmented on the basis of

age, geographical region etc. Thus while the
demand for kwality ice cream in India is Total
Market Demand, demand for Kwality ice cream
in Rajasthan or demand for Kwality ice cream
by women is a market segment demand
• Utility Analysis

• The Utility analysis was developed by Alfred

Marshall to explain consumer demand. This
approach was based on the fact that utility is
quantifiable i.e it can be measured in some
units. The unit for measurement of utility is
known as util.

• Thus for example, it can be said that ice cream

has 10 utils while Rasgulla has 6 utils. This
holds true for a person who likes ice cream
more than rasgulla.
• Since utility can be measured in specific units ,
so it can also be added. We thus have total
utility and marginal utility.

• Total utility , which is a measure of the overall

satisfaction, is defined as the total satisfaction
derived from the consumption of all the units of
a good or service.

• Marginal utility, on the other hand is the change

in total utility when one additional unit of a good
or service is consumed. Thus, if the utility
derived from the consumption of 1,2,3….n..
Units of goods or services are U1, U2, U3….Un
then

Total Utility for 1 unit TU1 = U1

for 2 units TU2 = U1 + U2
for 3 units TU3 = U1 + U2 +U3
for ‘n’ units TUn = U1+U2 +U3 +..Un

Marginal utility for the 2nd unit MU2 = TU2 – TU1

for the 3rd unit MU3 = TU3-TU2
Assumptions of Utility Analysis
1. Utility is cardinal (fundamental)
2. Utility being quantifiable is additive
3. Various units of a commodity consumed are
homogenous. For example, if the case relates
to the consumption of 200ml bottles of soft
drink , then all the units consumed must be
200ml bottles of the same soft drink
4. There is no time gap between the
consumption of successive units. The
consumer goes on consuming the units one
by one, without any break
5. The consumer is rational, i.e he has perfect
knowledge and maximises utility.
6. The consumers income is limited and
constant
7. The tastes and preferences of the consumer
remain unchanged
8. The marginal utility of money is constant.
Here the marginal utility of money is the
change in total utility that results from
spending one additional unit of money.