Dear Reader,

Satish Deodhars second book in the IIMA Business Books series,

published in collaboration with Random House, is informative
and stimulating.
The book begins with a clear discussion of basic microeconomic
concepts, such as utility, cost, supply and demand curve, price
determination, producer and customer surplus, and dead weight
loss. Satish next moves to a crisp exposition of various forms of
market competitionperfect competition, monopoly, monopolistic
competition, and oligopoly. He highlights various mechanisms that
producers might use to extract consumer surplus and provides a
lucid exposition of game theory, made all the clearer with examples
such as Phoolan Devi and Veerappan facing prisoners dilemma.
The book proceeds to a description of various forms of market
failure and the role of regulation in addressing them. The last chapter
provides retrospection through the topics covered and ends with an
intriguing crossword. At the end of each chapter, references afford
interested readers the opportunity to explore topics in further depth,
and ready reckoners provide descriptions of key terms.
In a deceptively simple manner, the book offers practitioners
a thorough and in-depth perspective on a broad swathe of
microeconomics topics. Throughout, Satish explains these concepts
in a straightforward manner, claried with the help of simple and
intuitive charts and peppered with rich instances from business
and daily life.
Why I am Paying More is one of a series of books authored by
IIMA professors who are not only academically procient but also
have rich experience in consulting and teaching executives. These
books are intended to disseminate knowledge in relevant topics in
management to practicing executives. Written in conversational
style with illustrations from the world of practice, the books are
eminently readable and applicable in daily life.
I am condent you will enjoy Why I am Paying More, as you
will other books in the series. Please do let us know if there are
particular topics that you would like covered in the books published
in this series.
Ashish Nanda
Director
IIM Ahmedabad
IIM
AHMEDABAD
BUSINESS BOOKS
Why I am Paying More
Price Theory and Market Structures Made Simple
Also by Satish Y. Deodhar
Day to Day Economics
RANDOM HOUSE INDIA
IIM
AHMEDABAD
BUSINESS BOOKS
SATISH Y. DEODHAR
Why I am Paying More
Price Theory and Market Structures Made Simple
Published by Random House India in 2013
1
Copyright Satish Y. Deodhar 2013
Random House Publishers India Private Limited
Windsor IT Park, 7th Floor, Tower-B,
A-1, Sector-125, Noida-201301, UP
Random House Group Limited
20 Vauxhall Bridge Road
London SW1V 2SA
United Kingdom
978 81 8400 405 2
This book is sold subject to the condition that it shall not,
by way of trade or otherwise, be lent, resold, hired out, or
otherwise circulated without the publishers prior consent in
any form of binding or cover other than that in which it is
published and without a similar condition including this
condition being imposed on the subsequent purchaser.
Typeset in Sabon by R. Ajith Kumar
Printed and bound in India by Replika Press Private Limited
To Deepali,
partner-in-life I met a score years ago
and
to Sylee (17) and Yash (13),
the most formidable domestic teen cartel!
CONTENTS
Preface xi
Acknowledgements xiii
0. Introduction 1
1. Utility and Market Demand 9
2. Cost Concepts and Market Supply 21
3. Societal Welfare, Free Enterprise, and Market Price 35
4. Price Ceiling, Price Floor, and the New 53
Support Paradigm
5. Perfect Competition 80
6. Monopoly 117
7. Pricing to Extract Consumers Surplus 148
8. Monopolistic Competition 178
9. Oligopoly 201
10. Market Failure and the Government 242
11. Retrospection 261
A Note on the Author 276
A Note on the IIMA Business Books 279
PREFACE
This book may be considered as a sequel to my rst book,
Day to Day Economics. When Day to Day Economics was
published, I was quite apprehensive about the acceptance of
the book by readers. However, there was a pleasant surprise in
(book) store! Readers were very kind to me and they turned out
to be quite an extrovert lot. They would send sporadic emails
or post reviews on blogs and online bookstores expressing their
liking for the book. Students and participants from various
management programmes at IIMA also complimented me for
making economics accessible and relevant. While this was a
humbling experience for me, readers discerningly pointed out
that the book had focussed mostly on macroeconomic issues.
It was suggested that I should also write a similar book on
microeconomic issuesissues which would describe why in
most cases economists vouch for free enterprise system, how
prices are set in different market structures, and what are the
circumstances that justify governments role in free enterprise
system. These suggestions sounded almost like the Sanskrit
aphorism, Atha to Brahma Jidnyasaan inquisitiveness
to know the ultimate reality! Writing a textbook on
Preface
xii
microeconomics would not have served the purpose, for the
market for textbooks has already become overcrowded. The
challenging task was to write a book that will appeal to the
intuition of non-economists and non-academicians. Hence
this modest efforta sequel to Day to Day Economics.
ACKNOWLEDGEMENTS
This book being a sequel to my earlier book in the IIMA
Business Book Series, I must admit my continuing debt to my
family members. As in the past, they endured an inescapable
distraction from the comforts of a family of four. I also
wish to thank many readers of Day to Day Economics
who suggested to me to write a book on economic issues
relating to microeconomics. When I was half way through
this book, Random House and Penguin came together to
form a new entity, Penguin Random House. Of course,
while the publication of this book is being concluded
under the banner of Random House, I could now cite a live
example of business mergers in the chapter on Oligopoly.
If Penguin Random House has retained the maiden name
of Random House, Radhika and Milee have continued to
practice business culture of their sanguine Random House!
Thanks to both of them for stoically yielding to somewhat
moving deadlines.
The book you are about to read was not penned by me
alone, for I have been greatly inuenced by my economics
teachers as also by my colleagues at IIMA. I have been
Acknowledgements
xiv
fortunate to assimilate information from diverse sources
such as academic journals, textbooks, newspapers,
government documents and the internet. Unabashedly, I
have relied on all of them to help me connect the dots and
further our understanding of pricing and market structures.
And, of course, in the absence of the proofreaders, designers,
and reviewers from Random House, the book could not
have seen the light of the day. I wish to thank them all.
CHA PT E R 0
INTRODUCTION
The basic problems of economics are simple; the hard
part is to recognize simplicity when you see it. The next
hardest part is to present simplicity as common sense
rather than ivory tower insensitivity. Theory needs to teach
more of both.
Harry G. Johnson
Ever since independence, the prime ministers have been
addressing the nation from the ramparts of the Red Fort every
15th August. Perhaps with the exception of the euphoria of
a few initial years, most people give the speech a miss every
year. Closer home, amongst our acquaintances, most of us
do encounter a few persons who have a habit of talking quite
a lot. Our usual response is to either avoid such persons or
reluctantly endure their presence. The purport of this is that
such talk gets perceived as being cheap because its supply
Why I am Paying More
2
seems to exceed demand. Of course, there is no rupee price
attached to that talk, for it is a non-market activity. However,
the intuition we apply in such a deduction is no different than
the one usually employed in the marketplace.
Consider a somewhat similar situation in the marketplace.
A worried client who meets up with his lawyer for consultation
behaves differently. The client listens to the lawyer with rapt
attention and knows that he has to pay the fees, perhaps
handsome amount of rupees per hour. The lawyers talk is
not free. The lawyer offers a service in the market which
may or may not be cheap but there is a positive rupee price
attached to it. Like the lawyers service, practically zillions
of goods and servicesfrom abacus and apples to zucchini
and zyloscopeare produced, traded, and consumed in the
market. And, each one has a positive price attached to it at
any given point in time. What is the process through which
this price discovery occurs? Are the prices unilaterally decided
by individual rms? Do households have any say in setting
the prices? These are some of the questions one would like
to get answers to. In fact, come to think of it, it is almost a
mystery as to how customers choose from among zillions of
products available in the market. Given their preferences for
various products, household income, and the prices prevailing
in the market, some activity must be taking place in the
minds of the customers that guides them to make particular
consumption choices. It will be worth fathoming what goes
on in the minds of customers.
Price determination gets much more interesting depending
Introduction
3
upon different market structures. Why is it that saree
emporiums and apparel shops offer heavy discounts on a
few occasions during the year? Why is it that airline tickets
booked well in advance are always cheaper? Why is it that
many amusement parks and fairs in town and cities charge
an entry fee at the gate and once again charge separate tickets
for different rides inside? And then, of course, there are
many prices such as electricity tariffs and minimum wages
that are xed by government intervention. Are such price
interventions by government justied and on what grounds?
Such and many similar economic issues are quite relevant
to customers and producers alike. It is for this reason that
one of the most inuential economists of the late nineteenth
and early twentieth century, Alfred Marshall, described
economics as the study of mankind in the ordinary business
of life. He published his book, Principles of Economics way
back in 1890, and it went on to become a standard textbook
for generations of economics students. Today, of course,
the textbook market is getting increasingly overcrowded
for economics in general and for principles of economics
in particular. As will be discussed in this book later, the
market for economics textbooks can be characterized as a
monopolistically competitive market!
Most economists seem to believe in the doctrine of free
enterprise or capitalism. It does not come as a surprise
when the best advocates of free enterprise, economists
such as Milton Friedman say, Many people want the
government to protect the consumer. A much more urgent
Why I am Paying More
4
problem is to protect the consumer from the government.
However, even John Maynard Keynes, the father of modern
macroeconomics, who believed in government intervention to
promote employment during the times of recession, seemed to
be sympathetic to free enterprise and capitalism. He is alleged
to have said, Capitalism is the astounding belief that the
most wickedest of men will do the most wickedest of things
for the greatest good of everyone. If economists swear by
free enterprise so much, there must be a way to explain to a
layperson as to why this is so. And yet, you bet there are some
weak links in the free enterprise system where government
intervention is required.
The issues raised above form the subject matter of what is
called microeconomics. As an informed citizen of the modern
world, one must know the basic ideas behind the issues that
have been raised above. Of course, it is difcult to explain
the laws of nature or their applications, either from physics
or economics, purely from the standpoint of a theoretician or
purely from the standpoint of a practitioner. Isaac Newtons
challenge to explain laws of motion to a snooker world
champion is no harder than the world champions challenge
to turn Newton into an international snooker player! One has
to nd a middle ground. There is a vacuum of understanding
that needs to be lled with a book that presents principles of
microeconomics to laypersons by relating them to their day
to day activities, experiences, lifestyles, anecdotes, and their
understanding of history, culture, and geography. This book
hopes to serve that purpose.
Introduction
5
You will agree with me that we all have been students
at some point in time or another. In fact, in todays modern
world we just never seize to be one. The materialistic world
around us is such that a student of any discipline, even a
casual student of life, cannot become market worthy unless
she understands at least a few concepts in economics. This
is all the more true for someone who opts for a bachelors
or a masters programme in business management and
economics. If you want to understand marketing concepts
such as price sensitivity or market segmentation, rest assured
these concepts are based on the idea of price elasticity of
demand which originated in economics literature. You may
want to understand nance concepts such as movement of
stock prices and rate of returns and they were originally
thought through in economics literature. While learning
linear programming in the decision science courses, you
will come across the term shadow prices. It is based on the
economic concept of scarcity of resources and its value.
The literature on wage negotiations in human resource
management gets related to economic concepts such as
efciency wages and bilateral monopoly. The concept of
Prisoners Dilemma and its economic extensions are a
masterpiece in strategic signalling and communication. And,
of course, a student of international business has to have
a sound understanding of trade theories propounded by
economists. This book cannot touch upon all these claims
in detail. However, you will certainly get a hint or a dash
of a few in the following pages.
Why I am Paying More
6
With the above objectives in mind, Chapters 1 and 2 cover
two fundamental building blocks of economicsmarket
demand curve and the market supply curve, respectively.
Chapter 3 integrates the demand and supply tools developed
in the earlier chapters to demonstrate how price gets
determined in free markets. This chapter also provides the
basis for the belief that free enterprise maximizes societal
welfare. Quite a few government interventions, price ceilings
or price oors in particular, seem to be welfare reducing.
Chapter 4 discusses such interventions in comparison to their
outcomes in a free enterprise system. Having understood the
working of markets in aggregate terms, chapters that follow
address the pricing decisions by individual rms in perfectly
competitive markets followed by pricing in imperfectly
competitive market conditions. Specically, on a full spectrum
of market structures, Chapter 5 deals with one end of the
spectrum described as perfect competition and Chapter 6
deals with another end of the spectrum called monopoly.
Chapter 7 further devotes to pricing schemes that are possible
when rms have a certain degree of monopoly power where
markets are segmented.
Between perfect competition and monopoly, there are two
important market structuresmonopolistic competition and
oligopoly. These are covered in detail in Chapters 8 and 9,
respectively. In Chapter 10, circumstances which necessitate
a role for government intervention to take care of various
market failures of a free enterprise system are discussed.
Finally, the book is concluded in Chapter 11 by taking a
Introduction
7
retrospective view of what has been presented in the earlier
chapters. By the end of the book, I hope to have achieved in
part, what economist Harry Johnson had opined and which
I have quoted at the beginning of this chapter. To this end,
I have appended a crossword puzzle to the last chapter. The
crossword puzzle may serve two purposesit can be viewed
as an unobtrusive self-accreditation by the reader and a litmus
test of whether or not I have succeeded, at least partially, in
addressing the concern Harry Johnson had expressed in 1974
in the foremost journal in economicsAmerican Economic
Review.
REFERENCES:
Johnson, H., (1974), The State of Theory, American Economic
Review, Vol. 64, No. 2, Papers and Proceedings of the Eighty-
sixth Annual Meeting of the American Economic Association,
May, pp. 323324
Marshall, A., (1890), Principles of Economics, London: McMillan
and Company Ltd., republished in 1920, 8
th
edition
READY RECKONER
Microeconomics: Study of economic behaviour of agents
such as households and rms and determination of prices
and outputs in product and input markets.
Macroeconomics: Study of behaviour of aggregate variables
in an economy such as national income, unemployment,
interest rates, and ination.
Free Enterprise: An economic system with (mostly) private
ownership of factors of production and their rewards, where
economic activities are governed by market forces of demand
and supply. It is synonymous with the term Capitalism.
Capitalism: See Free Enterprise.
CHA PT E R 1
UTILITY AND MARKET DEMAND
What makes my approach special is that I do different
things. I do jazz, blues, country music and so forth. I do
them all, like a good utility man.
Ray Charles
THE MARGINAL UTILITY
I bet you have attended quite a few parties and some were
more memorable than others. Usually one enjoys going
to parties because it feels good. This feel good objective
has been dened in many different ways. One could call it
satisfaction, welfare, benet, or as economists would put
it, utility. It would be safe to assume that one would like to
maximize his or her utility while attending the party. How
does one maximize this utility? Well, resembling a piece of
furniture at the party does not help. Assuming that one is in
the company of interesting people, ones utility would depend
Why I am Paying More
10
on a few important features at the partyconversation,
cuisine, cocktail, and cavort. If you have only a few hours
at your disposal, a choice has to be made as to how much
time you can spend on each of these features or activities.
Of course, it would all depend on an individuals preference.
Some may want to spend substantive time conversing with
others, some may spend a good amount of time savouring
food, some others may prefer to hang around the bar, and
still some others would prefer to do a lot more of dancing
and cavort.
Whatever the individual choices, it must be true that the
nal minute spent on each of the activities must be giving
same additional utility (called marginal utility) to the party
goer. For, if that was not so, total utility could have been
maximized by switching a minute from one activity to
the other. If the marginal utility derived from spending an
additional minute on conversation was always higher than the
marginal utility derived from spending an additional minute
on other activities, then one would only talk at the parties.
Similarly, if the marginal utility of an additional minute spent
at the bar was always higher th an an additional minute spent
elsewhere, one would only have cocktails and nothing else!
The fact that most choose to engage in quite a few activities
shows that marginal utility of engaging in any one activity
must be declining as one does more of that activity. If this
was not so, there would have been specialization in the choice
of activity. One would either only talk or hog or cavort or
drink to no end, depending upon which activity gave higher
Utility and Market Demand
11
marginal utility per unit of time spent. For an alcoholic, it
must be true, therefore, that the marginal utility of drinking is
either very high, does not decline with every glass, or worse,
increases with every gulp. Therefore, alcoholics maximize
their utility by specializing in consumptionthat of liquor
alone! Thankfully, these are aberrations and not the norm
in human behaviour.
Of course, no one really sits down and calculates the
marginal utilities of different activities. Perhaps it simply
goes against the spirit of spontaneity that human beings
demonstrate. However, choices of utility maximizing levels
of each activity must be compared implicitly in ones mind.
Workings of a mind may be a black box but the mind must
be making implicit calculations taking into account the fact
that there is limited time available to spare, there are a few
activities available at the party that one can engage in, and
that each of the activity is characterized by diminishing
marginal utility. Perhaps this same idea is revealed by Ray
Charless quote mentioned at the beginning. His satisfaction
levels as a musician are highest when he engages in different
kinds of music styles. The amount of time he spends on each
type would be decided implicitly in his mind where marginal
utility derived per unit of time from each style of music
becomes equal. This is possible when marginal utility of
engaging in each music style declines as he engages more and
more in each of the styles. For, if this was not so, he would
maximize satisfaction by specializing in only one form of
music which gave him highest marginal utility per unit of time.
Why I am Paying More
12
Let us broaden this concept to product choices one makes
in the marketplace. Disposable income of a household is
generally less than the sum total of the salaries of the earning
members of a household, as they pay income tax. Out of the
disposable income, it is fair to assume that the household
saves some amount and the rest of the net income is available
for spending on products (both goods and services). In the
marketplace, from the morning alarm clock to the zero-watt
night lampfrom A to Zthere are innumerable products a
household consumes every month. How does the household
decide what to buy and how much to consume of each of the
products? A household would like to maximize its satisfaction
or utility given the constraint that net income per month is
limited and that products available in the marketplace have
positive prices. Of course, if net income was not a constraint
and/or unlimited quantity of products were available for
free, then there would be no economic choice to be made.
Life would have been uninteresting then. Fortunately that
is not the case and households have to make choices. Sure,
like the party goers and Ray Charles, this will depend on
the individual preferences of the household. However, it
also depends upon the all-important concept of diminishing
marginal utility. Given that the net income available to spend
on products is limited, products are positively priced, and
marginal utility declines as a household consumes more and
more of a product, household utility is maximized when
marginal utility per rupee spent on different products is equal.
For the ease of exposition, consider that there are only two
Utility and Market Demand
13
goods in the marketplace, A and Z. The utility maximizing
consumption levels of A and Z will be determined by an
implicit black-box calculation in ones mind given by the
equation:
MU(A)
=
MU(Z)
P
A
P
Z
where MU(A) and MU(Z) represent the marginal utilities
of products A and Z and P
A
and P
Z
are their market prices.
What this equation tells us is that when utility is maximized,
a rupee spent on both products gives same level of marginal
utility. For, if it were not so, household could have increased
total utility by spending more on a product that gave higher
marginal utility per rupee and spending less on the other
product that gave lower marginal utility per rupee. The
adjustment will continue until the equality is re-established.
The Water Diamond Paradox
The term Utility, for the satisfaction one receives on consumption of
a product was introduced by Jeremy Bentham in the late eighteenth
century in England. Around the same time, Adam Smith, considered
the Father of Modern Economics, made a mention in his treatise,
The Wealth of Nations (1776), regarding value-in-use and value-
in-exchange for a given product. He gave the famous example of
the Water Diamond Paradox. Diamonds have a high price, i.e.,
high value-in-exchange but they are unnecessary for life, i.e., low
Why I am Paying More
14
value-in-use. And, conversely, water has a low price, i.e., low value-
in-exchange but it is necessary for life, i.e., high value-in-use.
The economics profession had to wait till 1862 to explain
this paradox. That year, W.S. Jevons read a paper to the British
Association of the Advancement of Science introducing the concept
of marginal utility. He explained that it is not the total utility but
the additional utility derived from the consumption of the last unit
(marginal utility) that matters. Essentially, it is the marginal utility
that the household relates to product price, or what Adam Smith
called, value-in-exchange. Therefore, for someone who purchases
both diamonds and water, the following must be true:
MU(D)
=
MU(W)
P
D
P
W
where MU(D) and MU(W) represent the marginal utilities of
diamond and water and P
D
and P
W
are the market prices of
diamond and water. While the total utility derived from the stock
of water could be quite high compared to that from diamond, it is
also true that relative to diamonds water is abundantly available.
Therefore, given that the marginal utilities decline with additional
units of consumption, both the marginal utility and price of water
are low compared to the marginal utility and price of diamonds.
However, when total utility derived by consuming both products is
maximized, the ratio of the marginal utility to price should be same
for both. Moreover, there is also merit in the argument that one
cannot r eally make interpersonal comparisons of preferences and
utility. That diamonds are unnecessary for life is a very subjective
Utility and Market Demand
15
THE DEMAND CURVE
The concept of diminishing marginal utility is important to
understand the choices consumers make in marketplace. As
explained in the box above, it demysties the famous Water
Diamond Paradox of the marketplace. More importantly, the
concept gives an intuitive explanation to the inverse relation
between the price of a product and its quantity demanded.
Surely, at some point in time or another you must have formed
an early opinion about economicsthat it is concerned with
demand and supply? True, it is. And this is when the demand
curve comes into the picture.
Let us continue to assume that there are only two products,
apple (A) and zucchini (Z) in the marketplace. Let the prices
of apple and zucchini be P
A
= Rs 50/kg and P
Z
= Rs 25/kg
assessment. After all, a beggar may not get two square meals a
day but he could still smoke!
Perhaps by now you would be wonderingjust as weight is
measured in, say kilogrammes, can utility also be measured in, say
utils? Of course, the answer is a clear no. From the latter half
of the nineteenth century onwards, Wilfredo Pareto and other
economists argued that it is sufficient to rank utilities as higher or
lower to make choices in the marketplace and one does not need
to measure them cardinally. An elaborate explanation on this topic
is beyond the scope of this book. However, interested readers can
always refer to a standard principles textbook on microeconomics
(Mankiw, 2012).
Why I am Paying More
16
over a period of one month and the marginal utilities of
the last kilogrammes of apple and zucchini purchased by
a representative household during that month be 300 and
150 respectively. Given this information, the representative
household must have maximized its utility over the period
since:
MU(A)
=
300
= 6

=
MU(Z)
=
150
P
A
50

P
Z
25
where the number 6 represents marginal utility per rupee
spent on each of the two products. Now suppose that the
price of apple goes up to say Rs 75/kg in the following month.
This would mean that MU(A)/P
A
= 300/75 = 4, which is
less than 6. A rupee spent on zucchini continues to give a
marginal utility of 6 per rupee and a rupee spent on apple
now gives only 4. Therefore, total utility can be maximized by
reducing consumption of apples and increasing consumption
of zucchini. The adjustment will continue until a rupee spent
gives same level of marginal utility for both. Because both
products are subject to diminishing marginal utility, increase
in consumption of zucchini will lead to fall in its marginal
utility and vice versa for apples. The following could be a
possible outcome:
MU(A)
=
375
= 5

=
MU(Z)
=
125
P
A
75

P
Z
25
To cut the long story short, for a given level of net income,
as price of apple goes up, consumption of apple goes down.
Utility and Market Demand
17
And we now know howas price of apple goes up, the per
rupee marginal utility of apple goes down and hence the
household switches to more consumption of zucchini and less
of apple to make maximum use of its limited income. This
relation between price and quantity demanded of a product
is summarized by the Law of Demandceteris paribus, i.e.,
other things remaining the same, as the price of a product
goes up the quantity demanded falls. There is an inverse
relation between the two. This is depicted for a representative
household in Fig. 1 below where rupee price per kilogramme
of apple is measured on the vertical axis and quantity on the
horizontal axis. In Fig. 1 (a), the line segment dd shows the
downward sloping individual household demand curve for
apple. As the price of apple goes up from Rs 50/kg to Rs 75/kg
the quantity demanded falls, say from q
A50
to q
A75
. The
quantity q
A
could be measured in, say kilogrammes.
Of course, we only considered a representative household.
Preferences vary among different households and their
individual demand curves will be different. Some will be
willing to pay much higher prices and some others will buy
too many apples at very low prices compared to many others.
However, all such demand curves will be downward sloping.
If we were to add such individual demand curves for all
households, we get an aggregate demand curve for apples. In
fact, as price goes down, not only would existing customers
buy more apples but more customers would enter the market
to buy apples. A representative market demand curve is
depicted in Fig. 1(b) by the line segment DD which shows
Why I am Paying More
18
the total quantity of apples demanded (Q
A
) in the market
at each price level. We deliberately denote the quantity of
apples for market demand as Q
A
implying that Q
A
quantity is
much larger than the quantity q
A
demanded by an individual
household. The quantity Q
A
could be measured say in quintals
or tonnes. For simplicity of exposition we have assumed the
demand curves to be straight lines. They need not be.
Fig. 1: Household and Market Demand for Apples
(a) Household Demand Curve (b) Market Demand Curve



So far we have constructed the story of the process of
utility maximization by customers and its manifestation in
the marketplace through the household demand curve and the
market demand curve. However, demand is only one side of
the market economy. The supply story forms the other side.
In the next chapter, we move to building the foundation of
that story.




P
A

0
Q
A
D
D
P
A

0
Rs 75
Rs 50
q
A
q
A50
q
A75

d
d
Utility and Market Demand
19
REFERENCES:
Jevons, W.S., (1871), The Theory of Political Economy, London:
Macmillan and Co, http://www.econlib.org/library/YPDBooks/
Jevons/jvnPE0.html, Accessed on 31 March, 2013
Mankiw, N.G., (2012), Principles of Microeconomics, 6
th
edition,
Delhi: Cengage Learning
Smith, A., (1776), An Inquiry into the Nature and Causes of the
Wealth of Nations, Oxford Worlds Classics, New York: Oxford
University Press, Reissued in 2008
READY RECKONER
Demand Curve: A downward sloping graphical representation
of the law of demand.
Marginal Utility: Additional utility derived by consuming
one more (or the last) unit of a product.
Law of Demand: Ceteris paribus, i.e., other things (like
income) remaining the same, quantity demanded of a product
increases as its price goes down.
Total Utility: Satisfaction derived by consuming a certain
number of units of a product.