Some Questions
• What is behind a consumer’s demand
curve?
• How do consumers choose from among
various consumer “goods”?
• What determines the value of a consumer
good?
UTILITY
Utility is the power of a commodity or service
to satisfy some human want..
Characteristics of Utility
• It is subjective concept
• It cannot be equated with usefulness.
• Utility has nothing to do with ethics or
carries no moral significance.
• It differs from person to person and Time
to Time.
Kinds of Utility
• Marginal utility
• Total utility
/
• Average utility= total utility total units of
commodity consumed.
Marginal Utility
• Marginal utility is the utility a consumer
derives from the last unit of a consumer
good she or he consumes (during a
given consumption period), ceteris
paribus.
Total Utility
• Total utility: is the utility a consumer
derives in total from the consumption of all
of the units of a good or a combination of
goods over a given consumption period,
ceteris paribus.
Total utility = Sum of marginal utilities
Total Utility
Q ($) TU ($) MU
200
0 0
150
1 40 40
100
2 85 45
50
3 120 35
0
1 2 3 4 5 6 7 8 9 10 11 4 140 20
($) M U
5 150 10
50
6 157 7
40 7 160 3
30
20
8 160 0
10 9 155 -5
0
-10
1 2 3 4 5 6 7 8 9 1 11 10 145 -10
-2 0 145
Relation between TU & MU
• TU goes on increasing till the point of satiety has
reached while MU goes on diminishing.
• After the point of satiety, total utility begins to fall
while MU becomes negative.
• At the point of satiety, MU becomes zero but
total utility becomes maximum at this point.
• When more and more units of a commodity is
consumed, TU goes on increasing upto a certain
point while MU goes on decreasing.
How to Measure Utility
Measuring utility in “utils” (Cardinal):
• Jack derives 10 utils from having one slice of pizza but only 5 utils
from having a burger.
• In many introductory microeconomics textbooks this approach to
measuring utility is still considered effective for teaching purposes.
Measuring utility by comparison (Ordinal):
• Jill prefers a burger to a slice of pizza and a slice of pizza to a hotdog.
Often consumers are able to be more precise in expressing their
preferences.
For example, we could say:
• Jill is willing to trade a burger for four hotdogs but she will give up
only two hotdogs for a slice of pizza.
• We can infer that to Jill, a burger has twice as much utility as a slice
of pizza, and a slice of pizza has twice as much utility as a hotdog.
Laws of Cardinal Marginal Utility
Analysis
• Law of diminishing marginal utility
• Principle of Equi-marginal utility:
Consumer’s Equilibrium
The Law of Diminishing Marginal
Utility
• Over a given consumption period, as more and
more of a good is consumed by a consumer,
beyond a certain point, the marginal utility of
additional units begins to fall.
Law of Equi-marginal Utility
Consumer’s Equilibrium:
The consumer’s behavior will be governed
by three factors
1) The marginal utility of the good (s)
2) Prices of the two goods.
3) The Disposable Income
Law of Equi-marginal utility
This law states that:
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, that is
consumer is in equilibrium in respect of the
purchases of two goods X and Y
MUx/Px = MUy/Py
• The utility derived from the last rupee spent on
each good is equal.
Utility Maximizing Rules
• A rational consumer would buy an additional
unit of a good as long as the perceived
money value of the utility of one additional
unit of that good (say, its marginal dollar
utility) is greater than its market price.
• The Two-Good Rule
MUx MUy
--------- = ----------
Px Py
Utility Maximization under An
Income constraint
• Consumers’ spending on consumer goods is
constrained by their incomes:
Income = Px Qx + Py Qy + Pw Ow
• While the consumer tries to equalize
• MUx/Px = MUy/ Py,=MUw/Pw
• To maximize her utility her total spending cannot
exceed her income.
Optimal Purchase Mix: Ice Cream and
Hamburger
Q MUI PI MUI/PI MUH PH MUH/PH
1 40 10 4 45 6 7.5
2 45 10 4.5 30 6 5
3 35 10 3.5 20 6 3.3
4 20 10 2 15 6 2.5
5 10 10 1 10 6 1.7
6 7 10 0.7 6 6 1
7 3 10 0.3 3 6 0.5
8 0 10 0 0 6 0
