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What is utility?Want satisfying power of

commodity is called utility.

utility is the quality in

commodities that makesindividual want to buy the-Robinson.

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Features

It is subjective

Utility is relative.Utility is not essentiallyuseful

Utility is independent ofmorality

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Concepts of utility Initial utility- utility derived from the unit

of a commodity.

Total utility- aggregates of utilities fromconsumption of different units ofcommodity.

Marginal utility-change in TU by

consumption of an additional unit of acommodity.

Average utility-obtained by dividing TU byno. of units of commodity.

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TYPES OF UTILITY

CARDINAL

UTILITY

ORDINAL

UTILITY

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CARDINAL UTILITY ANALYSIS

According to this, utility can bemeasured

In cardinal numbers

unit of measurement-UTILS

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Cardinal utility

analysis

According to this, utilitycan be measured incardinal numbers.

Unit of measurement-utils

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Relation between TU,MU &

AU. UNITS TU MU AU

0 0 0 0

1 8 8 8

2 14 6 7

3 18 4 6

4 20 2 5 5 20 0 4

6 18 -2 3

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LAW OF UTILITY ANALYSIS

LAW OF

DIMINISHING

MARGINALUTILITY

LAW OF

EQUI

MARGINALUTILITY

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Law of Diminishing

Marginal utility

The additional benefit which aperson derives from a given stockof a thing diminishes with everyincrease in the stock that he

already has.

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ASSUMPTIONS Utility can be measured in cardinal

numbers

Mu of money remains constant. Mu of every commodity is

independent.

There is continuous consumption ofcommodity.

There is no change in income,T&P &

price of substitute goods,etc.10deepak

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Exceptions to Law

Curious and rare things.

Good poem & books.

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IMPORTANCE Basis of law of demand.

(why does demand curve slopesdownwards.)

Basis of law of equi MU

(does not spend on one commodity)

Basis of price determination

(price = MU)

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Diamond water paradox

According to this ,price ofcommodity is influenced by its

MU-since water is available inplentiful quantity , its MU is low oreven zero.

As diamond being scarce commodityMU is high.

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Law ofEqui marginal utility The law states that in order to get

maximum satisfaction, a consumer shouldspend limited income on different

commodities in such a way that the lastrupee spend on each commodity holds himequal MU.Also, it is a law of maximum satisfaction.A consumer gets maximum satisfaction

when the ratio of MU of all commodities&their price is equal.MU1/P1=MU2/P2=MU/P3

If prices are equal thenMU1=MU2=MU3

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Assumptions Cardinal measurement of utility is

possible.

Income of consumer remainsconstant.

Consumer is rational

Consumer can spend his income insmall units of money say Re.1

Price of commodity remains

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Law ofEqui marginal utility

Goods x

Units of

money

spent

MU(Utils)

1

2

3

4

5

6

7

60

55

50

45

40

35

30

Goods Y

Units of money

spent (Rs.)

MU(Utils)

1

2

3

4

5

6

7

50

45

40

35

30

25

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limitations

It is assumed that the consumerspends very small amount of moneyon different commodities.

The law assumes that utility can bemeasured.

The law assumes that thefashion,T&P&income of peopleremain constant.

The law is not applicable in case ofcomplementary goods

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Practical importancefor the law.

Consumption-how should a consumer spend his incometo maximize satisfaction.

Production-the producer combines the various factorsin such a manner that marginal returns from differentfactors are equalized

Exchange-utility derived from extra unit of commodityconsumed becomes equal to utility lost from the extraunit

Distribution & price determination

Public finance18deepak

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COND Distribution & price determination-the producer will

employ various factors till the point,where the cost ofemploying each one of them equals their marginalproductivity.

Public Finance-welfare state has to push up publicexpenditure in various directions upto a point, such thatMU are equal in all of them to ensure maximum socialbenefit & rates of taxation(marginal sacrifice of all tax

payers are equal)

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