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The want satisfying

capacity of a productis called utility.

Types of utility

Cardinal utility analysis

Ordinal utility analysis

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Utility concepts

Initial utility

Total utility

TU=f(Qx)

Marginal utility

MU=Tn-(Tn-1)

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Types of marginal utility

Positive marginal utility

Zero marginal utility

Negative marginal utility

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Total & marginal utility

Quantity Total utility Marginalutility

0 0

1 8 8

2 14 6

3 18 4

4 20 2

5 20 0

6 18 -2

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Importance of using TU & MU

Paradox of value

Laws of utility analysis

Law of diminishing marginal utility (LDMU)

Law of equi-marginal utilty (LEMU)

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Law of diminishing marginal utility

(LDMU)

Assumptions

Utility can be measured in cardinal system Marginal utility of money remains constant

MU of every commodity is independent.

Every unit of commodity is of same size & type.

Consumption is continuous.

No change in income

No change in taste , preference

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Exceptions

Rare things

Misers

Deficiency of the product

Habitual consumption (addiction)

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Law of equi-marginal utility (LEMU)

If a person has a thing which he can put to

several uses, he will distribute it in a waythat the utility derived from all becomesequal.

-Marshall

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Law of equi-marginal utility (LEMU)

Money M.U. of X M.U. of Y

1 12 10

2 10 8

3 8 6

4 6 4

5 4 2

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Law of equi-marginal utility (LEMU)

a consumer gets maximum satisfaction

when the ratio of marginal utilities of allcommodities and their price becomesequal

-Samuelson

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Criticism of the law

Consumers are not rational

Shortage of goods

Effect of fashion, taste Ignorance

Cardinal measurement not possible

Consumer's equilibrium

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Indifference curve

an indifference curve is a locus of all such

points which show different combinationswhich yield equal satisfaction to theconsumer

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Indifference curve analysis

Assumptions

Customer is rational

Consumer seeks maximum satisfaction Consumer is capable of ordering all

possible combinations

Marginal rate of substitution

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Price line or budget line

the price line shows the combinations of

the goods that can be purchased if the

entire income is spent-Ferguson

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Consumers equilibrium (IDC

analysis)

Income effect

Price effect

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Similarities between IDC and utility

analysis

Both are subjective

Both assume customer is rational

Condition of diminishing M.U.

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Superiority of IDC

More realistic

Free from the effect of independent

commodity

Free from the assumption of utility ofmoney being constant

Explains income and budgetary effects