Unit-III Utility Analysis

7/30/2019 Unit-III Utility Analysis

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UTILITY ANALYSIS

By

Mrs. N. Jayaprada Srinivas



INTRODUCTION Utility is the Power of a Commodity to satisfy human wants.

Total Utility i s the sum total of the units of utility which an

individual derives from the consumption of a commodity during a specified period of time .

Average Utility is the aggregate utility of commodities

consumed. Total Utility

AU= --------------------------------------------No. Of Units of Commodity consumed

Marginal Utility is the change in the total utility resulting

from one unit change in the consumption of a commodity

per unit of time. Change in Total Utility

MU = ---------------------------------------

Change in Quantity Consumed



LAW OF DIMINISHING MARGINAL UTILITY

The German Economist H. Gossen, who was first toexplain the law, said that

‘As the consumer consumes more and more units of a commodity, the utility from the

successive units goes on diminishing´.

Marshall explains the law as

‘The additional benefit, which a person derives

from an increase of his stock of a thing,diminishes with every increase in the stock that he

already has´.



ASSUMPTIONS

The Unit of Consumption must be a Standard One.

Consumption must be Continuous.

Multiple Units of the Commodity should be

Consumed. The tastes and preferences of the consumer should

remain unchanged during the course of

consumption.

The good should be normal and not addictive innature.



TOTAL & MARGINAL UTILITY

Units Total

utility

Marginal

utility1 10 10

2 15 5

3 19 4

4 22 3

5 23 1

6 23 0

7 21 -2

Total and Marginal Utility

TU

MU



LIMITATIONS OF THE LAW

Suitable UnitsSuitable Time

No Change in Consumer’s Tastes

RationalityRare Collections

Fashion

Not Applicable to Money



LAW OF DIMINISHING MARGINAL

UTILITY - APPLICATIONS

Helps in Taxation.

Price Determination.

Household Expenditure.

Basis of law of Demand.

Socialists View.

Consumer’s Surplus Concept.



LAW OF EQUI-MARGINAL UTILITY

It is an extension of the law of Diminishing Marginal

Utility to two or more commodities.

Given the income of a consumer, the law states that

consumer can get maximum satisfaction when the

Marginal Utility of the last rupee spent on each

commodity yield the same utility.

To get maximum satisfaction, consumer will substitute

one good for another.

It is also called as Law of Substitution, Law

of Indifference, or Law of Maximum Satisfaction.



LAW OF EQUI--MARGINAL UTILITY

Under Law of Equi- marginal utility, if the utility from

a commodity X is more than that from another

commodityY, then the consumer would reduce

consumption of Y and increase consumption of X.

Consumer equilibrium can be stated in the

following formula.

Mux / Px = MUy / Py = MUi

Where MU = Marginal Utility

P = Price

i = Income



THE RESULTING M ARGINAL UTILITY T ABLE

Units of Money MU x/ P x MU y /P y

1 11 9

2 10 8

3 9 7

4 8 6

5 7 56 6 4



LIMITATIONS OF THE LAW

Rationality

Effects of Fashion and Customs

Ignorance

Indivisible Units Questionable Assumptions



PRACTICAL IMPORTANCE OF THELAW

Applications to Consumption

Applications to Production

Applications to Exchange

Price Determination Applications to Distribution



Thank Q



A consumer consumes two goods A and B

and he makes five combinations a,b,c,d

and e of the two substitute commodities.

Combinations Units of Commodity



Indifference curve have a negative slope.

Indifference curve of imperfect substitutes are

convex to the origin.

Indifference curve do not intersect nor are they

tangent to one another.

Upper indifference curves indicate a higher level of

satisfaction



CONSUMER EQUILIBRIUM

The indifference map in combination with thebudget line allows us to determine the onecombination of goods and services that theconsumer most wants and is able to purchase.

This is the consumer equilibrium.

The consumer maxi-mizes satisfaction bypurchasing thecombination of goods that is on theindifference curvefarthest from theorigin but attainable given theconsumer’s budget.



INCOME EFFECT

The Income Effect is defined as the

total change in the quantity

consumed of a commodity due to

change in its income.

The increase in demand on account

of an increase in real income is

known as income effect.

The increase in real income

encourages the consumer to

demand more goods and services



PRICE EFFECT

The Price Effect is defined as

the total change in the

quantity consumed of a

commodity due to change

in its price.

Price Consumption Curve is a

locus of points of

equilibrium on indifference

curves, resulting from thechange in the price of a

commodity.



Substitution Effect arises due to

the consumer’s inherent

tendency to substitute cheaper

goods for the relatively

expensive ones.



CONCLUSION

The indifference curve indicates what the consumer

is willing to buy

The budget line shows what the consumer is able

to buy

When the indifference curve and the budget line are

combined, we find the quantities of each good the

consumer is both willing and able to buy



Income Consumption Curve

It is defined as a curve that joins

different equilibrium points whenthe income of the consumer

changes with fixed price.



INTRODUCTION

An Indifference Curve is defined as the

locus of points each representing a

different combination of two substitute

goods, which yield the same utility or

level of satisfaction to the customer.

An Indifference Curve is also called as Iso-utility

curve and Equal utility curve.

Documents

Unit-III Utility Analysis