\]

The diamond water paradox essentially states that there is no relationship between the
price and the utility of a product.

https://youtu.be/CzmCCoC33r4

Value is always subjective

The solution to this paradox was the subjective value theory. It’s simple enough: The
worth of something is not decided by the product itself, but by the person buying it.
When a person is faced with a choice between products/goods, their choice of what
they want and how much they want of each good is driven by their preferences. It’s
the reason why luxury goods exist. And it’s the reason why most economic market
theories are just theories. Everything is based on the ‘rational’ consumer, when in
reality, none of us are wired to be rational.

Factoring “irrational” behaviour

There is no logic that can define what something is worth to someone. We spend on
things that will give us utility. But we also spend on things that will give us joy or
bring us peace – neither of which can be defined for us by others. When it comes to
your finances, it’s essential that you take into account your irrationalities

Ultimately, worth is incredibly subjective. We pay for a number of things that people around
us may find hard to see value in and vice versa. But if you’ve decided something was worth
the money – in whatever way – never feel the need to justify it. It doesn’t matter. Others
don’t get to decide what’s worth your money. You do.

Income and substitution effect AND budget constraint from book

chapter 21

Concept of utility

Initial utility
The utility derived from the consumption of first
unit of the commodity is called initial utility.
It is always positive
Total utility
The aggregate of utilities obtained from the
consumption of different units of commodity is
called total utility.
Marginal Utility
The change that takes place in the total utility by
the consumption of an additional unit of
commodity is called marginal utility. It is also called
additional utility
Suppose by the consumption of the first piece of
bread you get 15 units of utility and by the
consumption of second piece you get 25 unit of
utility. Thus consumption of second piece of bread
added 10 units of utility to total utility. Thus MU is
10 units.

POSITIVE MARGINAL UTILITY

If by consuming additional unit of commodity total
utility goes on increasing , then the MU of these
units will be positive.
Suppose first piece of bread gives you 8 and
second gives 6 units of MU, thus TU equals to 14.
Thus, by taking additional unit TU goes on
increasing.MU derived from second piece of bread
will be called positive utility.

ZERO MARGINAL UTILITY

If the consumption of additional unit causes no
change in TU , it means MU of additional unit is
zero, at this level TU is maximum.
Suppose 4 piece of bread yield TU of 20 units.
Consumption of 5th piece of bread does not make
any change in TU. It remains 20 units . thus MU of
5th unit be zero.
NEGATIVE MARGINAL UTILITY

If the consumption of and additional unit of

commodity causes fall in TU it means MU is
negative.
After reaching the saturation point if the above
consumer is compelled to take 6th unit of piece of
bread then it may upset his digestive system. Thus,
TU comes down to 18 units. Therefore MU is -
2{18-20}. It is an example of negative MU.

What is Indifference Curve?

An indifference curve is a graphical representation of a combined products that gives similar kind
of satisfaction to a consumer thereby making them indifferent.Every point on the indifference
curve shows that an individual or a consumer is indifferent between the two products as it gives
him the same kind of utility.
Indifference Curve Analysis
 Each individual axis indicates a single type of economic goods. If the graph is on the curve or
line, then it means that the consumer has no preference for any goods, because all the good has
the same level of satisfaction or utility to the consumer. 

Indifference Map
The Indifference Map refers to a set of Indifference Curves that reflects an understanding and
gives an entire view of a consumer’s choices. The below diagram shows an indifference map
with three indifference curves.

Here, we understand that all three products resting in the indifferent curve give him the same
satisfaction. However, his preference for those combined products can be arranged in the order
of preference

Following are the features of indifference curve

(a) INDIFFERENCE CURVE  An indifference curve has a negative slope, i.e. it

ALWAYS SLOPES DOWNWARDS slopes downward from left to right.
FROM LEFT TO RIGHT  Reason: If a consumer decides to have one more
unit of a commodity
(say apples), quantity of another good (say oranges)
must fall so that the total satisfaction (utility) remains
same.

(a) INDIFFERENCE CURVE IS  IC is strictly Convex to origin i.e. MRSxy is always

ALWAYS CONVEX TO THE diminishing
ORIGIN  Reason: Due to the law of diminishing marginal utility
a consumer is always willing to sacrifice lesser units
of a commodity for every additional unit of another
 good.

(c) HIGHER INDIFFERENCE  Higher indifference curve represents larger bundles of

CURVE REPRESENTS goods i.e. bundles which contain more of both or
HIGHER LEVEL OF more of at least one.
SATISFACTION  It is assumed that consumer’s preferences are
monotonic i.e. he always prefers larger bundle as it
gives him higher satisfaction.

Deriving demand curve from book chapter 21