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UTILITY_ANALYSIS_HS_PPT[1] (1).pptx
- 1. Under the guidance of Prabhat K Jha Sir UTILITY ANALYSIS :- Marginal, Total, Consumer Surplus, Consumer Equilibrium
- 2. Ayush Kashyap Sinha 2101105CS Aman Verma 2101233CS Sumit Yadav 2101202CS Paritosh Chaurasia 2101232CS Pawan Maddheshiya 2101106ME Rudresh Patel 2101060CS Aryan Seth 2101218EC Aniket Singh 2101091CS Satwik Sanand 2101133CS Chirag Khaitan 2101175CS Suraj 2101127E C Sohel Khan 2101109CS Surajit Swargiary 2101078CS Group Members
- 3. • Utility is a term used by economists to describe the measurement of "useful-ness" that a consumer obtains from any good. An economic good yields utility to the extent to which it's useful for satisfying a consumer’s want or need. • Although the concept of utility is abstract, it is a useful way to explain how and why consumers make their decisions. • The economic utility of a good or service is important to understand because it directly influences the demand, and therefore price, of that good or service. In practice, a consumer's utility is usually impossible to measure or quantify. Utility Analysis
- 4. Measuring of Utility Utility can be measured in two ways -: ● Cardinal utility is the utility wherein the satisfaction derived by the consumers from the consumption of good or service can be measured numerically. ● "Cardinal" utility is the idea of measuring economic value through imaginary units, known as "utils." ● Ordinal utility states that the satisfaction which a consumer derives from the consumption of product or service cannot be measured numerically. ● "Ordinal" utility refers to the concept of one good being more useful or desirable than another.
- 5. TYPES OF UTILITY In economics, production refers to the creation of utilities in several ways. The four types of economic utility are form utility, time utility, place utility, and possession utility. These terms refer to the psychological importance attached to different forms of utility. For example, form utility is the result of the design of a product or service, and time utility refers to the ability of a company to provide services when the customers need them. Kinds of Utility Utility are of three kinds: Marginal Utility:(Marginal utility is the utility derived from the last or marginal unit of consumption.) Total Utility:(Total Utility is the utility from all units of consumption. ) Average Utility:(Average Utility is that utility in which the total unit of consumption of goods is divided by number of Total Units.)
- 6. Alfred Marshall, British Economist defines the law of diminishing marginal utility as follows: “The additional benefit which a person derives from a given increase in the stock of a thing diminishes with every increase in the stock that he already has.” This law is based on the fundamental tendency of human nature. Assumptions: Units of commodities consumed should be identical or homogeneous. Units should be consumed in quick succession with minimal breaks in minimal breaks in between. Units should be of a standard size, that is, neither too big nor too small. too big nor too small. The taste of the consumers should be constant A consumer must be rational, that is he can measure, calculate and compare the utility of a different commodity. THE LAW OF DIMINISHING MARGINAL UTILITY
- 7. “During the course of consumption, as more and more units of a commodity are used, every successive unit gives utility with a diminishing rate, provided other things remaining the same; although, the total utility increases.” Utils:' Utils are considered as the measurable 'unit' of utility. Suppose a person eats Bread and 1st unit of bread gives him maximum satisfaction. When he will eat 2nd bread his total satisfaction would increase. But the utility added by 2nd bread(MU) is less than the 1st bread. His Total utility and marginal utility can be put in the form of a following schedule. EXPLANATION
- 8. Plotting the above data on a graph gives In the given figure , Point of satiety(Zero MU)- denotes the point at which satisfaction goes down to zero. Marginal utility(MU) –along y-axis Total utility (TU)–along y-axis Unit of commodity consumed –along x-axis.
- 9. LIMITATIONS OF THE LAW 1. Case of intoxicants- 2. Not Applicable to money 3. Rare collections 4. Utility is subjective 5. Dissimilar units 6. Too long an interval
- 10. When marginal utility falls but is positive, total utility increases in a diminishing manner. • When marginal utility is zero, total utility is maximum. • When marginal utility is negative, total utility declines. Relationship between Marginal Utility and Total Utility:
- 11. Law of Equi-Marginal Utility explains the relation between the consumption of two or more products and what combination of consumption these products will give optimum satisfaction. Marginal Utility is the additional satisfaction gained by consuming one more unit of a commodity. • This law is based on the principle of obtaining maximum satisfaction from a limited income. It explains the behavior of a consumer when he consumes more than one commodity. Law of Equi-Marginal Utility
- 12. • The law states that a consumer should spend his limited income on different commodities in such a way that the last rupee spent on each commodity yield him equal marginal utility in order to get maximum satisfaction. • Suppose there are different commodities like A, B, …, N. A consumer will get the maximum satisfaction in the case of equilibrium i.e., MUA / PA = MUB / PB = … = MUN / PN Where MU’s are the marginal utilities for the commodities and P’s are the prices of the commodities. Some more about law...
- 13. 1. There is no change in the price of the goods or services. 2.The consumer has a fixed income. 3.The marginal utility of money is constant. 4.A consumer has perfect knowledge of utility. 5.Consumer tries to have maximum satisfaction. 6.The utility is measurable in cardinal terms. 7.There are substitutes for goods. 8.A consumer has many wants. Assumptions of the Law
- 14. 1. The law is not applicable in case of knowledge. Reading books provides more knowledge and has more utility. 2. This law is not applicable in case of fashion and customs. 3. This law is not applicable for very low income. 4. There is no measurement of utility. 5. Not all consumer care for variety. 6. The law fails when there are no choices available for the good. 7.The law fails in case of frequent price change. Limitation of the Law
- 15. 1. This law is helpful in the field of production. A producer has limited resources and tries to get maximum profit. 2. This law is helpful in the field of exchange. The exchange is of anything like some goods, wealth, trade, import, and export. 3. It is applicable to public finance. 4. The law is useful for workers in allocating the time between the work and rest. 5. It is useful in case of saving and spending. 6. It is useful to look for substitution in case of price rise. Importance of the Law
- 16. Utility is subjective The utility of a commodity is always subjective because it depends upon the consumer as much as on commodity. It is the psychological satisfaction as feeling of the consumer. Hence, it is internal not external Utility is Relative and Variable Utility is highly relative and variable. It varies from person to person and from time to time or place to place for the same individual. Again, a same commodity can give different utility to different people Utility and Pleasure It is not necessary that a commodity possessing utility also gives pleasure whenever it is consumed. An injection possesses utility to an individual. However, it gives him/her physical pain. Hence, utility and pleasure are unrelated Features of utility
- 17. Utility is Psychological Utility of a commodity depends on a consumer’s mental attitude and assessment regarding its power to satisfy his particular want. Psychologically, every consumer has his likes and dislikes and everyone determines his own level of satisfaction Utility is Abstract: It is abstract in a sense as it cannot be seen or touched or felt. For example, teaching of a teacher, advice of a lawyer can neither be seen nor touched. Hence, utility is abstract Utility is independent of morality A commodity which satisfies any type of want, whether moral or immoral, socially desirable or undesirable, has utility, i.e., a knife has utility as a household appliance to a housewife, but it has also a utility to a killer for stabbing some body.
- 18. What is Total Utility? Total utility is defined as a quantifiable summation of satisfaction or happiness obtained from consuming multiple units of a particular good or service. It is the overall satisfaction that a consumer derives from the consumption of particular goods and services. Each individual unit of goods or services has a marginal utility of their own. What is the purpose of Total utility ? Utility and total utility are used in the economic analysis of consumer behaviors within a marketplace. In general, economic theories believe that consumer actions are usually based on the goal of total utility maximization, which leads to purchasing units perceived to have the greatest utility satisfaction.
- 19. Calculating Total Utility Each individual unit of a good or service has its own utility and each additional unit of consumption will have its own marginal utility. The total utility will be the aggregated sum of utility gained from all units being studied. A total utility formula will include utils. Utils are typically relative and assigned a base value. TU = U1 + MU2 + MU3 … ; TU = Total Utility, U = Utility, MU = Marginal Utility
- 20. Graph Total utility operates hand in hand with marginal utility, which measures the additional satisfaction received from the consumption of a good or service. From the graph we understand that as long as marginal utility is positive, total utility will increase. Once marginal utility is negative, then total utility will decrease. Example of Total Utility Axel is craving for ice cream and decides to have a scoop of it. The first scoop of ice cream provides Axel with 7 utils of happiness. He wants more so he eats another scoop of ice cream, where his total utility is 12 utils. The table in the next slide shows how Axel's utility changes as he consumes additional scoops of ice cream.
- 21. Quantity Consumed Total Utility Marginal Utility 0 scoops 0 utils - 1 scoop 6 utils 6 utils 2 scoops 10 utils 4 utils 3 scoops 12 utils 2 utils 4 scoops 16 utils 0 utils 5 scoops 15 utils -2 utils 6 scoops 12 utils -4 utils additional The additional scoops provide Axel with more utility up until the 4th scoop, at which point Axel's utility is maximized. Beyond 4 scoops we can see that Axel is actually experiencing less and less total happiness. Axel's marginal utility decreases as he consumes more ice cream. This is explained by the fact that the second, third and fourth scoops of ice cream were less satisfying to him than the first scoop.
- 22. Total utility Marginal utility What does it mean? It is the aggregate of satisfaction that a consumer derives from the consumption of any particular goods or services. It is the amount of satisfaction derived by a consumer by additional consumption of a unit of any particular goods or services. Rate of increase Total utility rises as more consumption is done, till maximun satisfaction is achieved and thereafter decreases. Marginal utility is always decreasing and eventually becomes even negative. The following table will help us understand the significant points of difference between total utility and marginal utility.
- 23. Total utility Marginal utility Outcome Total Utility always has a positive outcome, no matter what. Marginal Utility may be positive, zero or even negative. Point of Satiety At this point, the Total Utility is maximum. Marginal Utility is exactly zero.
- 24. CONSUMER SURPLUS Consumer surplus, also known as consumer’s surplus or social surplus, is the difference between the actual price a consumer paid for a product and the maximum price they were willing to pay. Put simply, consumer surplus is the benefit consumers feel when buying something at a lower price than expected.
- 25. CONSUMER SURPLUS A consumer surplus happens when the price consumers pay for a product or service is less than the price they're willing to pay. Consumer surplus is based on the economic theory of marginal utility, which is the additional satisfaction a consumer gains from one more unit of a good or service. Consumer surplus always increases as the price of a good falls and decreases as the price of a good rises. It is depicted visually by economists as the triangular area under the demand curve between the market price and what consumers would be willing to pay. Consumer surplus plus producer surplus equals the total economic surplus.
- 26. Airline tickets: Airline ticket prices change rapidly, with countless sites dedicated to guaranteeing consumers the lowest price. If you’re willing to pay $500 for a flight from New York to Los Angeles, but end up paying $300, you receive $200 in consumer surplus. Sellers, however, know that you are willing to pay more for a flight, and will increase ticket prices before important dates like Thanksgiving or summer vacation, thereby turning consumer surplus into producer surplus. Examples of Consumer Surplus
- 27. A consumer is said to be in an equilibrium state when he feels that he cannot change his situation either by earning more or by spending more or by changing the number of things he buys. A rational consumer will purchase a commodity up to the point where the price of the commodity is equivalent to the marginal utility obtained from the thing. What is Consumer Equilibrium?
- 28. Example
- 29. ● It enables consumers to maximize his/her utility from the consumption of one or more commodities. ● It helps the consumers to arrange the combination of two or more products based on consumer taste and preference for maximum utility. Importance of Consumer Equilibrium