Methods of Economic Analysis: An economic theory derives laws or
generalizations through two methods:
(1) Deductive Method and
(2) Inductive Method.
These two ways of
deriving economic generalizations are now explained in brief:
(1) Deductive Method of Economic Analysis: The deductive method is also named
as analytical, abstract or prior method.
The deductive method consists in deriving conclusions from general truths,
takes few general principles and applies them draw conclusions.
(2) Inductive Method of
Economic Analysis: Inductive method which also called empirical
method was adopted by the “Historical School of Economists".
It involves the process of reasoning from particular facts to general
principle.
Cardinal Utility:
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.
Ordinal Utility:
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
(i.e. consumer can rank his/her satisfaction level) when compared to another.
Marginal Utility:
Definition: The Marginal Utility refers
to the additional benefit (utility) a consumer derives from the consumption of
one additional unit of good or service.
Derivation of Demand Curve in the Case of a Single Commodity (Law of
Diminishing Marginal Utility):
Dr.
Alfred Marshall derived the demand curve with the aid of law
of diminishing marginal utility. The law of diminishing marginal utility states
that as the consumer purchases more and more units of a commodity, he gets less
and less utility from the successive units of the expenditure. At the same
time, as the consumer purchases more and more units of one commodity, then
lesser and lesser amount of money is left with him to buy other goods and
services.
Diagram/Curve:
We
conclude from above, that as the purchase of the units of commodity X are
increased, its marginal utility diminishes. So at diminishing price, the
quantity demanded of good X increases.
In economics, an expansion path (also called a
scale line) is a curve in a graph with quantities of two inputs, typically
capital and labor, plotted on the axes. The path connects
optimal input combinations as the scale of production expands
No comments:
Post a Comment