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Understanding Utility: Concepts and Types

Utility refers to the satisfaction or want-satisfying power of a commodity. It is subjective and relative to each individual. There are different types of utility - initial utility from the first unit, total utility from all units, and marginal utility from each additional unit. Utility can be measured cardinally in units called utils. The law of diminishing marginal utility states that the marginal utility of additional units of a commodity decreases as consumption increases. The law of equi-marginal utility holds that consumers maximize satisfaction by allocating income such that the last unit of spending on each good yields equal marginal utility.

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86 views19 pages

Understanding Utility: Concepts and Types

Utility refers to the satisfaction or want-satisfying power of a commodity. It is subjective and relative to each individual. There are different types of utility - initial utility from the first unit, total utility from all units, and marginal utility from each additional unit. Utility can be measured cardinally in units called utils. The law of diminishing marginal utility states that the marginal utility of additional units of a commodity decreases as consumption increases. The law of equi-marginal utility holds that consumers maximize satisfaction by allocating income such that the last unit of spending on each good yields equal marginal utility.

Uploaded by

juhikohli
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd

What is utility?

Want satisfying power of


commodity is called utility.

“utility is the quality in


commodities that makes
individual want to buy the”-
Robinson.
Features
 Itis subjective
 Utility is relative.
 Utility is not essentially
useful
 Utility is independent of
morality
Concepts of utility
 Initial utility- utility derived from the unit
of a commodity.
 Total utility- aggregates of utilities from
consumption of different units of
commodity.
 Marginal utility-change in TU by
consumption of an additional unit of a
commodity.
 Average utility-obtained by dividing TU by
no. of units of commodity.
TYPES OF UTILITY

CARDINAL ORDINAL
UTILITY UTILITY
CARDINAL UTILITY ANALYSIS
 According to this, utility can be
measured
In cardinal numbers
unit of measurement-UTILS
Cardinal utility
analysis

According to this, utility


can be measured in
cardinal numbers.

Unit of measurement-
utils
Relation between TU,MU &
AU.
UNITS TU MU AU
0 0 0 0
1 8 8 8
2 14 6 7
3 18 4 6
4 20 2 5
5 20 0 4
6 18 -2 3
LAW OF UTILITY
ANALYSIS

LAW OF LAW OF
DIMINISHING EQUI
MARGINAL MARGINAL
UTILITY UTILITY
Law of Diminishing
Marginal utility

 The additional benefit which a


person derives from a given stock
of a thing diminishes with every
increase in the stock that he
already has.
ASSUMPTIONS
 Utility can be measured in cardinal
numbers
 Mu of money remains constant.
 Mu of every commodity is independent.
 There is continuous consumption of
commodity.
 There is no change in income,T&P &
price of substitute goods,etc.
Exceptions to Law

 Curious and rare things.

 Good poem & books.


IMPORTANCE
 Basis of law of demand.
(why does demand curve slopes
downwards.)
 Basis of law of equi MU

(does not spend on one commodity)


 Basis of price determination

(price = MU)
Diamond water paradox
 According to this ,price of
commodity is influenced by its
MU-since water is available in
plentiful quantity , its MU is low or
even zero.
As diamond being scarce
commodity MU is high.
Law of Equi marginal utility
 The law states that in order to get maximum
satisfaction, a consumer should spend
limited income on different commodities in
such a way that the last rupee spend on
each commodity holds him equal MU.
Also, it is a law of maximum satisfaction.
A consumer gets maximum satisfaction
when the ratio of MU of all commodities
&their price is equal.
MU1/P1=MU2/P2=MU/P3
If prices are equal then
MU1=MU2=MU3
Assumptions
 Cardinal measurement of utility is
possible.
 Income of consumer remains constant.
 Consumer is rational
 Consumer can spend his income in
small units of money say Re.1
 Price of commodity remains constant.
Law of Equi marginal utility
Goods x Goods Y
Units of MU(Utils)
money Units of money MU(Utils)
spent spent (Rs.)

1 60 1
50
2 55 2
45
3 50 3
40
4 45 4
35
5 40 5
30
6 35 6
25
7 30 7
20
limitations
 It is assumed that the consumer spends
very small amount of money on different
commodities.
 The law assumes that utility can be
measured.
 The law assumes that the
fashion,T&P&income of people remain
constant.
 The law is not applicable in case of
complementary goods
Practical importance
for the law.
Consumption-how should a consumer spend his income
to maximize satisfaction.
Production-the producer combines the various factors
in such a manner that marginal returns from different
factors are equalized
Exchange-utility derived from extra unit of commodity
consumed becomes equal to utility lost from the extra
unit
Distribution & price determination
Public finance
COND……
 Distribution & price determination-the producer will
employ various factors till the point,where the cost of
employing each one of them equals their marginal
productivity.

 Public Finance-welfare state has to push up public


expenditure in various directions upto a point, such that
MU are equal in all of them to ensure maximum social
benefit & rates of taxation(marginal sacrifice of all tax
payers are equal)

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