UTILITY
Utility refers to want satisfying power of a commodity.
In objective terms, utility may be defined as the “amount of satisfaction derived
from a commodity or service at a particular time”.
Assumptions:
• UH:\Games.exetility can be measured.
• Marginal Utility of money remains constant
• No change in income of the consumer, his taste & fashion to be constant
• No substitute
• Independent marginal utility of each unit of commodity
Utility Characteristics:
• Utility is subjective/not measurable
• Utility is variable
• Utility is different from usefulness
• No legal or moral connotations
Marginal Utility (MU)
The word Marginal means “Border” or “Edge”.
It is the addition made to the total utility by consuming one more unit of a
commodity.
Total Utility (TU)
Total Utility refers to the total satisfaction derived by the consumer from the
consumption of a given quantity of a good.
TU = Sum of all MU
Relationship between TU and MU
I.
TU=sum of MU
II.
TU increases so long as MU is positive.
III.
When MU is zero, TU is maximum
IV.
When MU is negative, TU is diminishing.
* The exponents of the utility analysis have developed two laws which occupy a
very important place in economics theory and they are :#
Law of Diminishing Marginal Utility
#
Law of Equi-Marginal Utility
Law of Diminishing Marginal Utility
The additional benefit a person derives from a given increase of his stock of a thing
diminishes with every increase in the stock that he already has
Law of Equi-Marginal Utility
The consumer will spend his money income on different goods in such a way that
marginal utility of each good is proportional to its price
Consumer’s equilibrium
Consumer will attain its equilibrium (maximum satisfaction) at the point, where
marginal utility of a product divided by the marginal utility of a rupee, is equal to
the price.
Consumer’s equilibrium = Marginal utility of a product
Marginal utility of a rupee
= its price
CONSUMER’S EQUILIBRIUM IN ONE COMMODITY
CASE
•
•
•
•
•
•
Consumer is in equilibrium when he gets maximum satisfaction.
He will get maximum satisfaction if MU of a commodity in money terms is equal
to its price.
CONDITIONS OF CONSUMER EQUILIBRIUMSS
Px=MUx
Since it is difficult to compare MU of a good (expressed in utils) with its price
(expressed in Rupees) therefore MU of a good is converted into MU of a Rupees.
By using following formula;
MUx
MUx
Px= ------------------ or MUm= ----------------
SCHDULE
MU of Rs= 2.
Mum
No.of orange MU (utils)
Px
MU (Money) Price of
Orange
1
10
5
1
4
2
8
4
1
3
3
5
2.5
1
1.5
4
2
1
1
0(equilibrium)
5
1
5
1
-0.5
Gain
Consumer equilibrium in two commodity case
Consumer will be in equilibrium if he allocates his expenditure so that the utility
gain from the last Rs Spent on each commodity is equal.
• Law of DMU is extended to many goods because he buys many goods which the
consumer buys with his income.
MUx
MUx
• Px= ------------------ or MUm= ---------------Mum
Px
MUy
MUy
• Py= ------------------ or MUm= ---------------Mum
Py
MUx
MUy ----------------- = ----------------Px
Py
……………Equa 1
Schdule in two commodity case
Units
MUx (utils)
MUy (utils)
MUx/Px
MUy/Py
1
20
24
10
8
2
18
21
9
7
3
16
18
8
6
4
14
15
7
5
5
12
12
6
4
6
10
9
5
3
M=24
Px=2
Py=3
• Px . X + Py . y=M
• 2(6)+3(4)=24
Indifference curve
A curve which is a diagrammatic presentation of indifference set. It shows
different combinations of two commodities between which a consumer is
indifferent. Each combination offers him the same level of satisfaction.
Budget line:
Budget line is a line showing different combinations of two goods which a consumer
can buy, given his income.