UTILITY ANALYSIS

AND
DEMAND CURVE

Meaning of Utility:
The term utility in economics is used to denote that
quality in a commodity or service by
virtue of which our wants are satisfied. In other words,
want satisfying power of a good
is called utility.
Definitions:
According to Jevons, Utility refers to abstract quality
whereby an object serves
our purpose.
In the words of Hibdon, Utility is the quality of good
to satisfy a want.
According to Mrs. Robinson, Utility is the quality in
commodities that makes
individuals wants to buy them

1. Utility is Subjective: as it deals with the mental

satisfaction of a man. A thing may
have different utility to different persons. E.g. Liquor has utility for
drunkard but for
person who is teetotaller, it has no utility.
2. Utility is Relative: As a utility of a commodity never
remains the same. It varies with
time and place. E.g. Cooler has utility in summer not during winter
season.
3. Utility is not essentially Useful: A commodity having utility
need not be useful. E.g.
Liquor and cigarette are not useful, but if these things satisfy the
want of addict then
they have utility for him.
4. Utility is independent of Morality: It has nothing to do
with morality. Use of opium
liquor may not be proper from moral point of view, but as these
intoxicants satisfy
wants of the opium eaters, drunkards, they have utility

Can utility be measured?

It can be attempted to measure by two methods:
1. Measurement in terms of Money: In order to
measure the utility in terms of money,
it is estimated what amount of money a man is
willing to pay for a thing.
2. Measurement in terms of Units: Prof. Fisher
has used the term, Util, as a unit for
the measurement of utility. In this method utility is
expressed in Utils.
Criticism of the Measurement of Utility:
It has been criticized by Prof. Samuelson as the value
of money keeps changing.
Therefore utility cannot be measured definitely in the
terms of money.
Marginal Utility: The change that takes place in the total
utility by the consumption
of an additional unit of commodity is called marginal utility

Laws of Utility
Analysis:
Utility has two main
laws:
1.Law of Diminishing
Marginal Utility
2.Law of Equi
Marginal Utility

LAW OF DIMINISHING MARGINAL UTILITY

Law of Diminishing Marginal Utility is the
foundation stone of utility analysis. All of us
experience this law in our daily life. If you buy pen
at any given time, then as the number
with you is increasing, the marginal utility from
each successive pen will go on
decreasing. It is the reality of mans life which is
referred to in economics as Law of
Diminishing Marginal Utility.

NO. OF ICE CREAM

CUPS

MARGINAL UTILTY

FIRST

SECOND

THIRD

FOURTH

FIFTH

SIXTH

-1

Table Shows:
The table shows that first cup of ice cream
yields 4utils of marginal utility.
The second cup of ice cream will yield less
marginal utility than the first one i.e. 3utils.
Third cup will yield still less MU, say
2utils.
Fourth cup will yield just 1utils of MU. At
this stage want may be fully satisfied.
Thus fifth cup will yield zero MU. If you
are forced to take sixth cup of ice cream it
may upset system and yields negative
utility say, -1 util.

+Ve

3
Point of Saturation
2
1
Zero MU
C
O

X
1

-1

6
B

In the Figure:
OX axis Ice Cream(Quantity)
OY axis Marginal Utility(MU)
AB is Marginal Utility Curve (MUC)
It slopes downward from left to right
(negative slope) indicating first cup
of ice cream 4 utils, second 3 utils,
third 2 utils and fourth 1util of
marginal utility. Fifth cup of ice
cream yields zero marginal utility.
AB curve touches OX axis at point
C that represents fifth cup of ice
cream.
sixth cup of ice cream yields
negative
marginal utility and so AB curve goes
below OX axis.

Exceptions:
Law does not apply under the following situations:
1. Curious and rare things Law does not apply to rare or
curious things like
persons who collect old and rare coins, postage stamps as
increasing marginal
utility as the stock of these rare articles goes on increasing. They
are always keen
to obtain more and more units of such things.
2. Misers It seems law does not apply to misers who are out
to acquire more and
more of wealth. Their desire for money seems to be insatiable.
3. Good book or poem It is said that by reading a good book
or listening to a
melodious song and a beautiful poem again and again one gets
more utility than
before.
4. Drunkards It can be said that when a drunkard takes a
liquor and intoxicant than
as he takes more and more pegs of liquor his desire to have more
of it goes on
increasing.
5. Initial units When the initial units of a commodity in used

Derivation of demand curve with the help of law of diminishing

marginal utility:
The price that consumer pays for a commodity is equal to its Marginal utility.
According
to law of diminishing marginal utility, as a consumer goes on purchasing
more and more
units of a commodity its marginal utility goes on diminishing. As such
consumer will buy
M units
Diminishing
MU
D when
more
of commodity
only
its price goes down. When marginal
M1
Demand Curve
utilityP1is expressed in terms of money, in that case, positive part of marginal
utility curve will be Price P2
M2
the demand curve
M3

P3

Q1 Q2 Q3
Quantity

U X

Q1 Q2 Q3
Quantity

When marginal utility is shown on OY axis then the curve obtained will be
marginal
utility curve. In case, price is shown on OX axis then the curve obtained
will be called
demand curve as is indicated in figure above. Figure A represents marginal
utility curve.

LAW OF EQUI MARGINAL UTILITY

Law of equi marginal utility is the second important law of
utility analysis. This law
point out of how a consumer can get maximum satisfaction out
of his given expenditure
on different goods. This law concerning the expenditure of the
consumer was propounded
in 19th century by a French engineer Gossen.
Dr Marshall has called it law of Equi Marginal Utility. It states
that in order to get
maximum satisfaction, 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.
Left witch refer to it as the general principal for maximization of
consumer satisfaction.
In simple words it is called as law of maximum satisfaction

Explanation:
The law can be explained with the help of table and figure below:
MU OF
MANGOES

MU OF MILK

12

10

10

[A]
12

MU OF MANGOES

10

10

Utility

4`
1

Equi Marginal Utility Line

[B]
MU of Milk

12

In the figure above:

OY axis Marginal Utility, OX Units of Rupees
The figure indicates that if the income of the consumer is Rs. 5, he will
spend Rs. 3
on mangoes and Rs. 2 on milk because third rupee spent on mangoes and
second
rupee spend on milk yield equal marginal utility i.e. 8utils.
Line adjoins the figure represents equal marginal utility derived from the
last rupee
spent on both the goods.
By distributing his income on mangoes and milk in this manner the
consumer gets
total utility of 48 utils.
MU of Milkby the consumer out of his
It will be the
MUmaximum
of Mangoestotal
12 utility derived
expenditure
10
10
E
of Rs.5.
8
A
8
F
It is
by spending
his income
the consumer
in this manner that the
6
6
consumer
will get B
maximum
satisfaction.
4
4
Gain
Loss
D

2
3
Rupees

C
4

G
1

2 3 4
Rupees

 If the consumer spends his income on mangoes a milk in any

other manner,
then his total utility will be less than the maximum; as in
figure above.
OX axis Rupees OY axis M. Utility
It is evident from the figure that by spending one rupee on
mangoes the
consumer gains 6utils of marginal utility as shown by ABCD
area.
Similarly by spending one rupee less on milk, the consumer
loses 8utils of
marginal utility as shown by EFGH area.

Thank You