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Optimum purchase rule
A rational consumer will consume any good or service up to the point where its MU=P and not beyond
Equimarginal Rule, consumer equilibrium
Occurs when the MU/P marginal utility per dollar of each good is the same as the others
Law of diminshing marginal utility
States that marginal utility falls as successive units are consumed
Description of law of dimishing marginal utility
A rational consumer will only purchase a good if the utility she receives from it is greater than or equal to the price she pays for it (Mu decreases as consumption increases) Therefore the consumer will only purchase an additional unit of the good if the price decreases to match the decrease in extra satisfaction she gains from consuming that good
Law of diminishing returns
States that as a producer adds increasing amounts of a variable input to a fixed amount of another input, total output will at first rise at an increasing rate, then rise at a diminishing rate, and may eventually fall
The producer requires more and more inputs for each successive increase in output (marginal costs increase as output increases)
The producer will not produce a unit of output unless the price he receives covers the MC of producing it. Since MC increases as output increases, the producer will only increase output if price increases to cover the higher MC
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