Utility and

Indifference curve
analysis
By. Nischay. K. Upamannyu
Definition of Utility

Definition:
According To Javones “Utility refer to abstract quality
whereby an object serves our purpose”.

According To Hidden “Utility is that quantity of good to

stisfy a want”.

According To Robinson “Utility is the quality in

commodities that makes individual want to buy them”.
Meaning of Utility

The term utility in economic is used to denote that

quality in a commodity or service by virtue of which
our want are satisfied. In other word, want and
satisfying power of good is called utility.

“It is power of commodity which satisfy need and want

of the customer”.
Feature of Utility

 Utility is subjective:- As it deal with the mental satisfaction of

human being. A good and service may have different utility to
different person.
Exp-Liquor has utility for alcoholic not for others.

 Utility is Relative;- As a utility of a commodity never remain the

same. It vary with time and place.
Exp- Cooler has utility in summer not during winter season.

 Utility is not essentially useful:- A commodity having utility

need not to be useful.
Exp- Liquor and cigarettes are not useful but if these things
satisfy the want of addict so Liquor and cigarettes have utility.
 Utility is independent of morality:- it has nothing to do
morality. Use of liquor may not be proper form moral
point of view, but as these thing, satisfy the
intoxicants need and want.
Type of Utility

Initial Utility:- The utility is derived from the first unit of

commodity is called initial utility. It is obtained from the
consumption of the first unit of a commodity. It is always
positive.

Total Utility:- The aggregate of utility obtained from the

consumption of different unit of a commodity, is called
total utility.

Marginal Utility:- The changes that take place in the total

utility by the consumption of an additional unit of
commodity is called marginal utility.
Type of marginal utility

 Positive marginal utility:- if by consuming additional units of

commodity, total utility goes on increasing than marginal
utility of these units will be positive. exp- Liquor

 Zero Marginal utility:- If the consumption of additional unit of

commodity does not impact in the total utility. It means the
marginal utility of additional unit is zero. Exp- additional right
shoes have zero marginal utility without more left shoes.

 Negative Utility:- If the consumption of an additional unit of a

commodity cause fall in total utility. It means the marginal
utility is negative.
Table :- Show total utility, marginal utility

Quantity Total Utility Marginal Description

utility
0 0 8-0 =8 Initial utility
1 8 14-8 =6
2 14 18-14 =4 Positive utility
3 18 20-18 =2

4 20 20-20 =0 Zero Utility

5 20 18-20 =-2 Negative
utility
6 18
Measurement of utility: a quantification of
satisfaction of wants and needs achieved
through the consumption of goods and
services

There are two method for measuring utility

 Cardinal utility:-cardinal utility, which is based on
numerical value (1,2,3,4,5……).when utility is
measured on the basis of cardinal utility so it is
checked that what amount of money a consumer is
willing to pay for a good and service.

 Ordinal Utility:-Ordinal utility, which is based on raking

(firs, second, third, fourth, five ………). In this method utility
is expressed in utils.
Criticism on the measurement of utility

 It has been criticized by Prof. Simuelson as the value

of money because money keep changing therefore
utility can not be measured definitely in the terms of
money.
Law of Diminishing marginal utility

Law of diminishing marginal utility is the foundation

stone of utility analysis. Law of diminishing
marginal utility stated that as the quantity
consumed of a commodity increases, the utility
derived form each successive unit decrease and
this law applies to all kind of consumer goods-
Durable and non-durable- sooner and later.

Exp- if some one buy a pen so the utility of pen will be

highest but as he keep on buying pen and increase
the no. of pen so the utility of the pen would
automatically be reduced. It apply also real life of
human being.
 Table of Total and Marginal utility
Schedules

No. of unit Total Utility Marginal Utility

consumed
1 30 30
2 50 20
3 60 10
4 65 5
5 60 -5
6 45 -15
Graph Presentation

TU
70
60
50
40
30
20
10
0
1 2 3 4 5 6
-
7
10
MU
Why Does the MU Decrease?

 The utility gained form a unit of a commodity

depend on the intensity of the desire for it. When
a person consume successive unit of commodity,
his need is satisfied by degree in the process of
consumption, and the intensity of his need goes
on decreasing therfore the utility obtained from
each successive unit goes on decreasing.
Definition:-

 According to Marshall “the additional benefit which a

person derives form given stock of thing diminishes with
every increases in the stock that he already has”.

 According to Champion “the more we have thing, the less

we want additional increments of it or more we want not to
have additional increment of it.”

 According to Samuelson “as the amount consumed of

good increase the marginal utility of a good tends to
decrease”.
it is clear from the above definition that at a given time
when we go on consuming additional unit of a commodity,
the marginal utility from each successive unit of that
commodity, other thing being equal, goes on diminishing
in relation to the preceding unit.
Assumption of Law of Diminishing marginal
utility

 The unit of the consumer good must be a

standard, one Exp- a cup of tea, bottled of cold
drink, a pair of shoes or trousers, etc. it the units
are excessively small or large, the law may not be
applied.

 Consumer taste or preference must be remain the

same during the period of consumption otherwise
law of diminshing marginal utility may not be
applied.
 There must be continuity in consumption. Where
break in continuity is necessary, the time interval
between the consumption of two units must be
appropriately short.

 Mental condition of the consumer must remain

normal during the period of consumption.
Explanation- the law can be explained with the
help of the table and figure below.

UNIT Total Utility Marginal utility

1 Glass 20 20
2 Glass 32 12
3 Glass 40 8
4 Glass 42 2
5 Glass 42 0
6 Glass 39 -3
5
0
TU
4
0
3
0
2
0
1 2 3 4 5
1 6 MU
0
0

-5
Exception

 Curious and Rare thing- Law does not apply to rare or

curious thing like person who collect old and rare
coins, postage stamps as increasing managerial utility
as the stock of these rare article goes an increasing.
They are alawys keen to obtain more & more unit of
such thing.

 Misers- It seem law does not apply to misers who is

curious to acquire more and more wealth. Their desire
for money seem to be instable
 Good book or Poem :- It is said that by reading a good
book or listening to melodious song and a beautiful
poem again and again on gets more utility than
before.

 Intoxicated thing- It is said that the desire of

intoxicated thing can not be end. The more use of
such type of thing the more satisfaction is found.

 Initial unit- when the initial unit of a commodity is

used in less than appropriate quantity, then the
marginal utility from the additional units goes on
increasing.
Indifference Curve

 An indifference curve may be defined as the locus of

point each representing a different combination
of two substitute goods, which yield the same
utility or level of satisfaction to the consumer.
Therefore, he is indifferent between any two
combination of two goods when it comes making a
choice between them.
An indifference curve is also called ISO Utility curve
and Equal utility curve.
A consumer preference among consumption bundle may
illustrated with indifference curve (an indifference curve
shows bundle of goods that the make consumer equally
happy).
  Exp- a consumer consume two goods, X and Y, and he makes five
combination a, b, c, d and e of the two substitute commodities.

Combination Quantity of Quantity of Total Utility

Pepsi (Y) Pizza (x)

A 25 3 U
B 15 5 U
C 8 9 U
D 4 17 U
E 2 30 U
 30
Commodity X

25

15

10

0
5 7 10 12 15 20 25
30 Commodity Y
The Marginal Rate of Substitution (MRS)

 An indifference curve is formed by substituting one

good for another. The MRS is the rate at which one
commodity can be substituted for another, the level of
satisfaction remaining the same.
Properties of Indifference curve

 Indifference curve will be downward slopping.

 Indifference curve can not intersect or touch each

other.

 Indifference curve must be convex to the origin.

 Upper indifference curve represent a higher level of

satisfaction than the lower ones
 Indifference curve will be downward slopping :- We
know that along and indifference curve the level of utility
always same, this mean that to get the same level of utility
if the consumer consume more of one commodity , he has
to consume less of the other commodity to maintain the
same level of utility. When the consumer increase the
consumption of commodity q1, the consumption of the
commodity q2 remaining the same, the utility level of the
consumer will rise so to maintain the same level of utility
consumer has to sacrifice certain quantity of the
commodity q2 which will naturalize the additional gain in
utility from q1.

Q2 P
R
A kK
U

B
C D Q1
0
Explanation :-

 P is the a Point on the indifference curve U. at

this point the consumer consume OC unit of
commodity q1 and OA units of the commodity
q2. when the consumer moves from the point
of P to point R, he consume CD unit more of
q1. as the result of this his utility level
increases. To neutralize this increase in utility
he decrease consumption of q2 by the
amount AB unit so as to remain on the same
indifference curve
Two indifference curves can not
intersect or touch each other:

Q2

A
C U1

0 B U0
D
M N Q1
Explanation:

 When two indifference curve intersect each

other. Suppose that there are two indifference
Uo and U1, Where U1 denotes a higher level
of utility than the indifference curve Uo. The
curve intersect at a point A and C is a point of
vertically above the point B. it can be said
that CPB (C is more preferable than B), This
means that an indifference curve has to lie
wholly above or below another indifference
curve so that a higher indifference curve
represent a higher level of utility
An indifference curve must be convex
to the origin:
 Indifference curve is not only negative sloped,
but are also convex to origin. The convexity of
the indifference curves implies two properties.
1. that the two commodity are substitutes for each
other
2. That the marginal rate of substitution b/w the
two goods decreases as a consumer moves
along an indifference curve.
Upper indifference curve Represent a
Higher level of satisfaction than the
lower ones
 An indifference curve placed above and to the
right of another represent a high level
satisfaction than the lower ones. It represent
a higher level of satisfaction. The reason is
that upper indifference curve contains all
along its length a larger quantity of one or
both the good than the lower indifference
curve. And a larger quantity of a commodity is
supposed to yield a greater satisfaction than
the smaller quantity of it.
Comparison between Lower and Upper
Indifference curve

C
O
M
M b
O
DI c
T d
Y
IC2
y a

IC1
0 x
Commodity Of X
Consumer Equilibrium

 consumer attains his equilibrium where he

maximizes his total utility, given his income
and market prices of good and services
what he consume.
 The consumer is said to be in Equilibrium when
he obtains the maximum possible satisfaction
form his purchase, given the income of consumer
and prices of good in the market.
 Under the indifference curve and Budget line
approach consumer is in equilibrium at a point
where the price is touching the attainable point.


Consumer equalibirum of one goods

mu1

Consumer
equilibrium mu

mu1
x
0 x
Equilibrium of the consumer of many
goods

A
j

Q E
P m IC3

IC2
K
O IC1

Q B
Consumer Equilibrium

When consumer make choice about the

quantity of good and service to consume, it is
presumed that their objective is to maximize
total utility. In maximizing total utility, the
consumer faces a number of constraints, the
most important of which are the consumer
income and the prices of the goods and
services that the consumer wishes to consume.
Effect of change in income on consumer
demand
 We examine the effect of change in consumer’s
income on his consumption behavior, assuming that
prices of all goods and services, and consumer’s taste
and preference remain constant.
when consumer income change, his capacity to buy
goods and services change too, other things
remaining the same. These changes are by a parallel
upward or downward shift in the consumer’ budget
line. When consumer income decrease, his budget line
shift downward and when consumer increase, his
budget line shift upward to the right. With the changes
in his income, the consumer moves from one
equilibrium point to another. Such movement show
the rise and fall in the consumption market.
J C
E

C
B

IC5

IC4
IC3
I IC2
IC1
J
K L M N
Assumption of Consumer Equilibrium

 There must be indifference map showing scale of

preference for various combination of good and this
scale of preference remains the same throughout the
analysis.

 Constant Income
 Price remain constant
 Good are divisible
Budget Line or the Budget constrain

 Every rational consumer seek to maximise his

total utility of the commodity bundle he consume.
However, he has a given income which sets limit
to his maximizing behavior and it is called budget
line. When he spends it in purchasing particular
proportions of the two commodities whose prices
are predetermined, income acts as constraints in
the attempt for maximizing utility.
 Exp- Let Y be the fixed income of the consumer
and P1 and P2 be the prices per unit of q1 and q2.
then budget equation of the consumer can be
written as
Y=P1.Q1+P2.Q2
Graph of budget line

Q2

Y/
P
2

O
Y/P1 B Q1
Income increase

 If the income of the consumer increase, the price

of the commodity remaining the same, then his
budget line shift to the right. Similarly, if the
income of the consumer decrease the budget line
will shift downward.

 If the price of one commodity changes the price

of the other commodity and the income of the
consumer remaining the same, the slope of the
budget line change.
Graph of budget line and its constraints


.
Figure 1- Budget line due to change in income, price
remaining the same2- Budget line due to change in price of
q1, price of q2 and income
q2 remaining the same
q2
C
A Decrease In
A price of
Increase in good q1
E income

Increase in
Decrease price of
in income good q1

0 F B D D B C q1
q1 0
The Budget Line

Consumption Ice cream (per Cola (Per

possibility month) month)
A 0 10
B 1 8
C 2 6
D 3 4
E 4 2
F 5 0
The Budget line

10
Income Rs.30
Ice cream Rs. 5
8
Cola Rs. 3

6
Cola
unaffordable
Per 4
Month
affor Budget
2 dable line

0
1 2 3 4 5 6 7 8 9
10
Changes in price and income

10
10
8
8
6
6
4
4
2
2
0
0
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Budget line

 Budget line and budget constraint line shows all the

possible combination of two goods that the consumer
can buy if he spend the whole of this given sum of
money on his purchase at given prices.

 It represent the various combination of two goods

which can be purchased with a given money income
and assumed prices of good.

 Budget line is drawn as continuous line. It identifies

the option from which the consumer cnn choose the
combination of good.
Budget line schedule
 Suppose a consumer has Rs. 60 to spend on Apples and
Mangoes and the prices of them are Rs. 6 and Rs. 12 per unit
respectively. So its schedule can be as.

Combination Apples (Rs.6) Mangoes (Rs.12)

A 10 0
B 8 1
C 6 2
D 4 3
E 2 4
G 0 5
Change in the budget line

 Income Changes:
 A change in the income, the prices of goods remaing the
same, the budget line shift from original position to the
right upward or to the left inside.

 A rise in the income of a consumer shift the budget line to

the right or upward

 A fall in the income shift the budget line to the left side.

Suppose the income of the consumer increases to Rs. 72 so

now it can buy 12 units of apples and 6 unit of mangoes.
Change in the Budget line

 Price changes

 If the total income of money and price of one commodity remains the
same and only price of one commodity changes so it also changes the
budget line.

 It causes consumer to buy more of that commodity which price has

fallen.
Suppose the price of mangoes has decrease form Rs 12 to Rs. 10 and
income and price of apples remains constant so now consumer can buy
more of mangoes.
Consumer Surplus

 The concept of consumer surplus was first

introduced by Marshall. The surplus arises
because we “receive more than we pay”. It is
difference between the amount of money
that we are willing to pay and the money
we actually pay, consumer enjoy consume
surplus if we pay the same amount of money
for each and every unit of good bought. The
amount that the consumer is willing to pay for
the first unit of good he buys is termed as
consumer marginal value. The marginal value
decrease as more and more units are bought .
Graph of Consumer Surplus

A p
1 p2
R1 r2
N
p
B

Q1 Q2 Q q