That Property of a Commodity Which Satisfies the Wants of the Consumers is Called Utility

7/30/2019 That Property of a Commodity Which Satisfies the Wants of the Consumers is Called Utility

1/10

That property of a commodity which satisfies the wants of the consumers is called utility . Then it is wantsatisfying power of a commodity. It is subjective and ethically neutral concept.

Total Utility

Sum of utilities derived from the consumption of certain units of a commodity. Number of units consumedincreased total utility increases with a diminishing rate.

Marginal Utility

Marginal utility is the utility derived from consumption of one additional unit of a commodity.

MUn = TUn TUn-1 or

MUn = DTU/DQ where DQ = 1

In graphical analysis the MU can be obtained by measuring the slope of the TU curve.

Law Of Diminishing Marginal Utility

The law has seen developed by Marshall, the founder of cardinal utility analysis.

The additional benefit which a person derives from a given increase of his stock of a thing diminishes withevery increase the stock he already has.

Cups of tea Total Utility Marginal Utility

1 12 12

2 22 10

3 30 8

4 36 6

5 40 4

6 41 1

7 39 -2

8 34 -5


2/10

Illustration of Law

When one cup of tea is taken per day. The total utility will be 12 and due to its first cup the marginal utility willalso 12. With the consumption of two cups per day the total utility rises to 22 but marginal utility will fall to 10.The consumption of tea increases six cups per day, from these additional cups he marginal utility will goes ondiminish. When 7 cups of tea consumed per day then instead of giving positive marginal utility the seventh cupwill give negative marginal utility -2, this is due to too many cups consumed per day may cause him gastrouble or acidity. More than six cups of tea per day gives inutility rather than satisfaction.

Utility Analysis & Assumptions of Cardinal Utility Analysis

The Classical and neo-classical theories of welfare based on cardinal utility. The premises on which utilitybases are below:

1. Cardinal Measurement of Utility

Utility is a measurable and quantifiable entity. A person can express the utility or satisfaction derived from agood in quantitative term as 10 units, 15 units, 20 units. It can be express in cardinal number.

2. Independent Utility

The second important tent of the cardinal utility analysis is the hypothesis of independent utility. On thishypothesis the utility which a consumer derives from a good is the function of quantity of that good and of thatgood only. It dose not depend at all upon the quantity consumed of others goods. The goods possessindependent utilities and or addictive.

3. Marginal Utility of Money Remain Constant

Another important premises of Marshalls marginal utility analysis is the constancy of marginal utility of money. According to it marginal utility of a commodity diminishes as more of it is purchased or consumed, the marginalutility of money with the purchases remains constant throughout.

The assumption of constant marginal utility of money is a crucial Marshallian utility analysis. When the price of a good falls and real income of a consumer rises, and the marginal utility of money will fall, but Marshall ignorethis and assume that marginal utility of money did not change as a result of change in price.

4. Introspection Method

Another important assumption of the cardinal analysis is the use of introspective method of judging thebehaviour of a marginal utility. The cardinalist school assumes that the behaviour of marginal utility in the mindof another person can be judged with the help of self observation.

Let suppose, a person know that he purchase more and more a good the less utility he derived from theadditional utility of it. Applying this method a person can read other person mind and can say with confidencethat marginal utility of a good will diminish as have more units of it.


3/10

The quantity of product that the consumers are willing to buy at a given priceover a given period of time is called demand for that product. Thus demand is:

1. The desire for possession, and2. The willingness (and ability) to pay for

Factors Determining Demand Demand for a product is influenced by the following factors:

1. Price of the commodity itself (charges or expected charges)2. Tastes and preferences of the consumers3. Incomes of the consumers4. Price of the related goods, substitutes or complementary.5. No of consumers in the market .

Law of Demand

It is clear that demand is always at a price. The price and quality demandedhave an inverse relationship . Thus increase in price of a product will decreaseits demand and vice versa. It is called law of demand and it assumes all other factors to be constant except price.

Related Articles

Economics as Science of Wealth, Definition &Characteristics of Wealth

4 Business Cycle Phases,Depression, Revival, Prosperity& Recession Phases

4 Factors of Production,Land, Labor, Capital &Entrepreneur

Business Obligations toShareholders employeesconsumers & society

Capital Factor of Production, Characteristics of Capital

Causes and Factors of

Business Cycle, Internal &External Factors of BusinessCycle

Let us consider the following example:

Px 12 10 8 6 4 2

Qx 10 20 30 40 50 60

Plotting the above law of demand graphically

We have the curve dd which given us various price-quantity combinations demanded by the consumers. The

demand curve is a negatively slopped curve moving from left to right, showing the inverse relationship.

The increase or decrease in demand due to price changes is referred to as the extension or contraction of demand.

The factor held constant, does not increase or decrease the demand along the original demand curve but theyshift the whole demand curve towards right or left.

Reasons for Downward Sloping Demand Curve
http://studylecturenotes.com/management-sciences/economics/292--economics-as-science-of-wealth-definition-a-characteristics-of-wealthhttp://studylecturenotes.com/management-sciences/economics/292--economics-as-science-of-wealth-definition-a-characteristics-of-wealthhttp://studylecturenotes.com/management-sciences/economics/292--economics-as-science-of-wealth-definition-a-characteristics-of-wealthhttp://studylecturenotes.com/management-sciences/economics/326-4-business-cycle-phases-depression-revival-prosperity-a-recession-phaseshttp://studylecturenotes.com/management-sciences/economics/326-4-business-cycle-phases-depression-revival-prosperity-a-recession-phaseshttp://studylecturenotes.com/management-sciences/economics/326-4-business-cycle-phases-depression-revival-prosperity-a-recession-phaseshttp://studylecturenotes.com/management-sciences/economics/79-factors-of-production-land-labor-capital-a-entrepreneurhttp://studylecturenotes.com/management-sciences/economics/79-factors-of-production-land-labor-capital-a-entrepreneurhttp://studylecturenotes.com/management-sciences/economics/79-factors-of-production-land-labor-capital-a-entrepreneurhttp://studylecturenotes.com/management-sciences/economics/345-business-obligations-to-shareholders-employees-consumers-a-societyhttp://studylecturenotes.com/management-sciences/economics/345-business-obligations-to-shareholders-employees-consumers-a-societyhttp://studylecturenotes.com/management-sciences/economics/345-business-obligations-to-shareholders-employees-consumers-a-societyhttp://studylecturenotes.com/management-sciences/economics/82-capital-factor-of-productionhttp://studylecturenotes.com/management-sciences/economics/82-capital-factor-of-productionhttp://studylecturenotes.com/management-sciences/economics/82-capital-factor-of-productionhttp://studylecturenotes.com/management-sciences/economics/329-causes-and-factors-of-business-cycle-internal-a-external-factors-of-business-cyclehttp://studylecturenotes.com/management-sciences/economics/329-causes-and-factors-of-business-cycle-internal-a-external-factors-of-business-cyclehttp://studylecturenotes.com/management-sciences/economics/329-causes-and-factors-of-business-cycle-internal-a-external-factors-of-business-cyclehttp://studylecturenotes.com/management-sciences/economics/329-causes-and-factors-of-business-cycle-internal-a-external-factors-of-business-cyclehttp://studylecturenotes.com/management-sciences/economics/329-causes-and-factors-of-business-cycle-internal-a-external-factors-of-business-cyclehttp://studylecturenotes.com/management-sciences/economics/329-causes-and-factors-of-business-cycle-internal-a-external-factors-of-business-cyclehttp://studylecturenotes.com/management-sciences/economics/329-causes-and-factors-of-business-cycle-internal-a-external-factors-of-business-cyclehttp://studylecturenotes.com/management-sciences/economics/329-causes-and-factors-of-business-cycle-internal-a-external-factors-of-business-cyclehttp://studylecturenotes.com/management-sciences/economics/82-capital-factor-of-productionhttp://studylecturenotes.com/management-sciences/economics/82-capital-factor-of-productionhttp://studylecturenotes.com/management-sciences/economics/82-capital-factor-of-productionhttp://studylecturenotes.com/management-sciences/economics/345-business-obligations-to-shareholders-employees-consumers-a-societyhttp://studylecturenotes.com/management-sciences/economics/345-business-obligations-to-shareholders-employees-consumers-a-societyhttp://studylecturenotes.com/management-sciences/economics/345-business-obligations-to-shareholders-employees-consumers-a-societyhttp://studylecturenotes.com/management-sciences/economics/79-factors-of-production-land-labor-capital-a-entrepreneurhttp://studylecturenotes.com/management-sciences/economics/79-factors-of-production-land-labor-capital-a-entrepreneurhttp://studylecturenotes.com/management-sciences/economics/79-factors-of-production-land-labor-capital-a-entrepreneurhttp://studylecturenotes.com/management-sciences/economics/326-4-business-cycle-phases-depression-revival-prosperity-a-recession-phaseshttp://studylecturenotes.com/management-sciences/economics/326-4-business-cycle-phases-depression-revival-prosperity-a-recession-phaseshttp://studylecturenotes.com/management-sciences/economics/326-4-business-cycle-phases-depression-revival-prosperity-a-recession-phaseshttp://studylecturenotes.com/management-sciences/economics/292--economics-as-science-of-wealth-definition-a-characteristics-of-wealthhttp://studylecturenotes.com/management-sciences/economics/292--economics-as-science-of-wealth-definition-a-characteristics-of-wealthhttp://studylecturenotes.com/management-sciences/economics/292--economics-as-science-of-wealth-definition-a-characteristics-of-wealth


4/10

When price fall the quantity demanded of a commodity rises and when price rise quantity of a commodity falls,other thing remaining the same.

There are two factors due to which quantity demanded increase when price falls.

1. Income Effect

When the price of a commodity falls, the consumer can by more quantity of the commodity with his givenincome. As a result, p rice of a commodity, consumers real price or purchasing power increase. This increase inreal income induces the consumer to buy more of that commodity. This is called income effect of the changesin price of the commodity.

2. Substitution Effect

The other reason why the quantity of a commodity rises as its prices falls is the substitute effect. When theprice of a commodity falls it becomes cheaper than other commodities. This induces the consumer to substitutethe commodity whose price is fallen for other commodities, which relatively becomes dearer.

Market Demand Curve

Horizontally summing up of all the individual demand curves gives us market demand curve.

Limitations of the Law of Demand

When the prices of normal goods rises, the demand for them decrease, there are few cases where the lawcannot operated.

1. Prestige Goods

There are certain commodities like sports car or diamond, which are the sign of distinction and honor in anysociety. If the price of these goods increases the demand for them may be increase instead of falling.

2. Price Expectations

Expect a further increase in the price of a specific commodity they will go to buy more and more in spite of rising in price. In this case the violation of law is temporary.

3. Ignorance of the Consumer

If the consumer is ignorant about the rise in price of goods, he may buy more of the commodity at higher price.

4. Giffen Goods

If the prices of basic goods like (sugar, wheat etc) on which the poor spend a large part of their incomedeclining the poor increase the demand for superior goods. When the price of giffen goods fall it demand willalso falls. There is a positive price effect in the case of giffen goods.

Supply and demand is perhaps one of the most fundamental concepts of economics and it is thebackbone of a market economy. Demand refers to how much (quantity) of a product or service isdesired by buyers. The quantity demanded is the amount of a product people are willing to buy at acertain price; the relationship between price and quantity demanded is known as the demandrelationship. Supply represents how much the market can offer. The quantity supplied refers to theamount of a certain good producers are willing to supply when receiving a certain price. Thecorrelation between price and how much of a good or service is supplied to the market is known as thesupply relationship. Price, therefore, is a reflection of supply and demand.

The relationship between demand and supply underlie the forces behind the allocation of resources. In
http://www.investopedia.com/terms/d/demand.asphttp://www.investopedia.com/terms/d/demand.asphttp://www.investopedia.com/terms/d/demand.asphttp://www.investopedia.com/terms/s/supply.asphttp://www.investopedia.com/terms/s/supply.asphttp://www.investopedia.com/terms/s/supply.asphttp://www.investopedia.com/terms/s/supply.asphttp://www.investopedia.com/terms/d/demand.asp


5/10

market economy theories, demand and supply theory will allocate resources in the most efficient waypossible. How? Let us take a closer look at the law of demand and the law of supply.

A. The Law of Demand The law of demand states that, if all other factors remain equal, the higher the price of a good, theless people will demand that good. In other words, the higher the price, the lower the quantitydemanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. As a result, people will naturallyavoid buying a product that will force them to forgo the consumption of something else they valuemore. The chart below shows that the curve is a downward slope.

A, B and C are points on the demand curve. Each point on the curve reflects a direct correlationbetween quantity demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 andthe price will be P1, and so on. The demand relationship curve illustrates the negative relationshipbetween price and quantity demanded. The higher the price of a good the lower the quantitydemanded (A), and the lower the price, the more the good will be in demand (C).

B. The Law of SupplyLike the law of demand, the law of supply demonstrates the quantities that will be sold at a certainprice. But unlike the law of demand, the supply relationship shows an upward slope. This means thatthe higher the price, the higher the quantity supplied. Producers supply more at a higher price becauseselling a higher quantity at a higher price increases revenue.
http://www.investopedia.com/terms/m/marketeconomy.asphttp://www.investopedia.com/terms/m/marketeconomy.asphttp://www.investopedia.com/terms/m/marketeconomy.asp


6/10

A, B and C are points on the supply curve. Each point on the curve reflects a direct correlation betweenquantity supplied (Q) and price (P). At point B, the quantity supplied will be Q2 and the price will beP2, and so on. (To learn how economic factors are used in currency trading, read Forex Walkthrough:Economics . )

Time and Supply Unlike the demand relationship, however, the supply relationship is a factor of time. Time is importantto supply because suppliers must, but cannot always, react quickly to a change in demand or price. Soit is important to try and determine whether a price change that is caused by demand will betemporary or permanent.

Let's say there's a sudden increase in the demand and price for umbrellas in an unexpected rainyseason; suppliers may simply accommodate demand by using their production equipment moreintensively. If, however, there is a climate change, and the population will need umbrellas year-round,the change in demand and price will be expected to be long term; suppliers will have to change theirequipment and production facilities in order to meet the long-term levels of demand.

C. Supply and Demand RelationshipNow that we know the laws of supply and demand, let's turn to an example to show how supply and

demand affect price.

Imagine that a special edition CD of your favorite band is released for $20. Because the recordcompany's previous analysis showed that consumers will not demand CDs at a price higher than $20,only ten CDs were released because the opportunity cost is too high for suppliers to produce more. If,however, the ten CDs are demanded by 20 people, the price will subsequently rise because, accordingto the demand relationship, as demand increases, so does the price. Consequently, the rise in priceshould prompt more CDs to be supplied as the supply relationship shows that the higher the price, thehigher the quantity supplied.

If, however, there are 30 CDs produced and demand is still at 20, the price will not be pushed upbecause the supply more than accommodates demand. In fact after the 20 consumers have beensatisfied with their CD purchases, the price of the leftover CDs may drop as CD producers attempt tosell the remaining ten CDs. The lower price will then make the CD more available to people who hadpreviously decided that the opportunity cost of buying the CD at $20 was too high.

D. Equilibrium When supply and demand are equal (i.e. when the supply function and demand function intersect) theeconomy is said to be at equilibrium . At this point, the allocation of goods is at its most efficientbecause the amount of goods being supplied is exactly the same as the amount of goods beingdemanded. Thus, everyone (individuals, firms, or countries) is satisfied with the current economiccondition. At the given price, suppliers are selling all the goods that they have produced andconsumers are getting all the goods that they are demanding.
http://www.investopedia.com/walkthrough/forex/beginner/level3/economic-data.aspxhttp://www.investopedia.com/walkthrough/forex/beginner/level3/economic-data.aspxhttp://www.investopedia.com/walkthrough/forex/beginner/level3/economic-data.aspxhttp://www.investopedia.com/walkthrough/forex/beginner/level3/economic-data.aspxhttp://www.investopedia.com/terms/e/equilibrium.asphttp://www.investopedia.com/terms/e/equilibrium.asphttp://www.investopedia.com/terms/e/equilibrium.asphttp://www.investopedia.com/terms/e/equilibrium.asphttp://www.investopedia.com/walkthrough/forex/beginner/level3/economic-data.aspxhttp://www.investopedia.com/walkthrough/forex/beginner/level3/economic-data.aspx


7/10

As you can see on the chart, equilibrium occurs at the intersection of the demand and supply curve,which indicates no allocative inefficiency. At this point, the price of the goods will be P* and thequantity will be Q*. These figures are referred to as equilibrium price and quantity.

In the real market place equilibrium can only ever be reached in theory, so the prices of goods and

services are constantly changing in relation to fluctuations in demand and supply.

E. Disequilibrium

Disequilibrium occurs whenever the price or quantity is not equal to P* or Q*.

1. Excess SupplyIf the price is set too high, excess supply will be created within the economy and there will beallocative inefficiency.

At price P1 the quantity of goods that the producers wish to supply is indicated by Q2. At P1, however,the quantity that the consumers want to consume is at Q1, a quantity much less than Q2. Because Q2is greater than Q1, too much is being produced and too little is being consumed. The suppliers aretrying to produce more goods, which they hope to sell to increase profits, but those consuming thegoods will find the product less attractive and purchase less because the price is too high.

2. Excess DemandExcess demand is created when price is set below the equilibrium price. Because the price is so low,too many consumers want the good while producers are not making enough of it.


8/10

In this situation, at price P1, the quantity of goods demanded by consumers at this price is Q2.Conversely, the quantity of goods that producers are willing to produce at this price is Q1. Thus, thereare too few goods being produced to satisfy the wants (demand) of the consumers. However, as

consumers have to compete with one other to buy the good at this price, the demand will push theprice up, making suppliers want to supply more and bringing the price closer to its equilibrium.

F. Shifts vs. MovementFor economics, the movements and shifts in relation to the supply and demand curves representvery different market phenomena:

1. MovementsA movement refers to a change along a curve. On the demand curve, a movement denotes a changein both price and quantity demanded from one point to another on the curve. The movement impliesthat the demand relationship remains consistent. Therefore, a movement along the demand curve willoccur when the price of the good changes and the quantity demanded changes in accordance to theoriginal demand relationship. In other words, a movement occurs when a change in the quantitydemanded is caused only by a change in price, and vice versa.


9/10

Like a movement along the demand curve, a movement along the supply curve means that the supplyrelationship remains consistent. Therefore, a movement along the supply curve will occur when theprice of the good changes and the quantity supplied changes in accordance to the original supplyrelationship. In other words, a movement occurs when a change in quantity supplied is caused only bya change in price, and vice versa.

2. ShiftsA shift in a demand or supply curve occurs when a good's quantity demanded or supplied changeseven though price remains the same. For instance, if the price for a bottle of beer was $2 and thequantity of beer demanded increased from Q1 to Q2, then there would be a shift in the demand forbeer. Shifts in the demand curve imply that the original demand relationship has changed, meaningthat quantity demand is affected by a factor other than price. A shift in the demand relationship wouldoccur if, for instance, beer suddenly became the only type of alcohol available for consumption.

Conversely, if the price for a bottle of beer was $2 and the quantity supplied decreased from Q1 to Q2,then there would be a shift in the supply of beer. Like a shift in the demand curve, a shift in the supplycurve implies that the original supply curve has changed, meaning that the quantity supplied iseffected by a factor other than price. A shift in the supply curve would occur if, for instance, a naturaldisaster caused a mass shortage of hops; beer manufacturers would be forced to supply less beer forthe same price.


10/10

Read more: http://www.investopedia.com/university/economics/economics3.asp#ixzz27wUNlf8w
http://www.investopedia.com/university/economics/economics3.asp#ixzz27wUNlf8whttp://www.investopedia.com/university/economics/economics3.asp#ixzz27wUNlf8whttp://www.investopedia.com/university/economics/economics3.asp#ixzz27wUNlf8whttp://www.investopedia.com/university/economics/economics3.asp#ixzz27wUNlf8w

Documents

That Property of a Commodity Which Satisfies the Wants of the Consumers is Called Utility