7.1 : Utility.
derivation of the demand curve and why consumers buy more when prices decrease.
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Define Utility.
Utility is the want satisfying power of a commodity and is it is the satisfaction - actual,
derived or anticipated from the consumption-of a commodity in a given time period. →
assumes that satisfaction can be cardinally measured in the same way that the actual
goods consumed can be determined.
Define and explain total utility and marginal utility
1. Total Utility → refers to the total satisfaction obtained from the consumption of all
possible units of a commodity. TU = Summation of all M.U.
2. Marginal Utility → is the utility gained from the conumption of one more unit in the
given commodity. M.U. → change in TU/ change in Q.
What is the Principle of Demising Marginal Utility
states that as a consumer consumes more of a commodity the marginal utility derived
from each successive unit goes on decreasing. Universal Application. Used for a
singular commodity. Consumer Surplus also works on this concept.
What is the Principle of Equi- Marginal Utility.
Gossen’s Second Law → consumers maximise their utility where their marginal valuation
for each product consumed is the same. ( MU=P)
i.e a consumers gets maximum satisfaction when ratios of MISS YOU of the two
commodities and their respective prices are equal and M.U alls as consumption RISES
because if it doesn't consumers continues to buy one and no equi. is reached.
NOT POSSIBLE to increase total utility by reallocating expenditure between any of the
products which are available.
Define consumer’s equilibrium
refers to the situation when a consumer s having maximum satisfaction with limited
income and has no tendency to change their way of existing expenditure. A rational
consumer aims to minimse expenditure with balanced and maximised ulitity.
How is an individual Demand curve derived.
What are the limitations of the theory
Cardinality and ability to rank prefrences. L.DMU assumes that consumers act rationally
for purchasing decisions.
What are assumptions for both of these behaviours.
1. Rationality & Perfect Knowledge → the consumer is rational and measures,
comapres utility of other products and aims at maximising satisfaction. Perfect
knowledge assumes that consumer knows the different goods on which income
can be spent and knows utility.
■ M.U of money remains same and income and prices of goods are
constant.
2. Measures → Cardinal that assumes utility can be measured and consumer
express satisfaction in quantitative terms. Monetary is that utility is measured in
monetary terms.
3. Change in Quality & Independent Utilities → a uniform quality is maintained and
all commodities are consumed by a consumer are independent. i.e M.U of one
good has no relation to THE M.U of the other. One person’s U is not affected by
another person.
4. Assumption of Rational Quantity & Continuous consumption → a proper amount
of the goods is consumed ( spoon vs glass), so a suitable and proper quanitty is
used to yeild utility. Continuous consumption is there that it is done in one go ( ice
cream in evening and morning no but 2 icecreams either time count).