MANAGERIAL ECONOMICS ASSIGNMENT

Q1.WHAT IS MEANT BY UTILITY? IS UTILITY MEASURABLE? WHAT IS THE

CONTROVERSY ABOUT MEASURABILITY OF UTILITY ? HOW DOES IT FIGURE
IN THE ANALYSIS OF CONSUMER DEMAND?

 Utility means use . It is defined on the basis of two angles product and consumer’s angle
 From product’s angle it is the want satisfying property of the commodity which has
absolute use . For example – Pen has its own use irrespective of the fact that the person is
literate or illerate .It sometimes also satisfy immoral needs.
 From Consumer’s angle it is the psychological feeling of satisfaction , pleasure ,
happiness and well being which consumers derive from the consumption , possession or
use of the commodity.Its use is subjective as a single commodity cannot be useful for all
as for e.g. Cigaratte for non smokers has no utility.Consumer’s utility varies from persons
to persons and time to time.
 There are two major concepts for the measurability of Utility – Cardinal and Ordinal
concept.
 Cardinal concept of utility says that it is quantitatively measurable whereas ordinal
concept says that utility is measured in absolute terms.
 Sir Alfred Marshall said that utility can be measured cardinally in terms of money.But by
the later economists this idea of measuring utility cardinally was discarded and
meaningless on three basic counts . They were as follows – Utility is subjective and
abstract concept i.e. how utility may derive from a unit of particular good may vary from
subject to subject.Secondly, although utility is measured in terms of money but the unit of
money is not constant so measurement would not be appropriate and thirdly it is believed
that the hypothesis of ordinal utility may lead to even an improved version of the theory
of consumer behavior.
 In ordinal utility concept also the consumer can compare the utility level derived from
different consumption situations and not directly utility.So is not measurable in true
sense.
 The key principle of utility in the analysis of consumer demand is the law of diminishing
marginal utility.
  The law states that “ the quantity consumed of a commodity goes on increasing , the
utility derived from the successive units goes on diminishing , consumption of all other
commodities remains the same.” It is applicable for all types of consumer goods durable ,
non – durable sooner or later.
 When unit of commodity consumed increases then marginal utility decreases i.e. utility
gained from a commodity depends on the intensity of desire for it.As when a person
consumes successive units of commodities his need is satisfied and so intensity of need
goes on decreasing so marginal utility also decreases.
 There are certain assumptions which are made to the law of diminishing marginal utility-
1) The unit of consumer good must be a standard one i.e. should not be excessively
small or large.
2) During the period of consumption consumer’s tastes and preference should remain
the same .
3) There should be continuity in consumption of a particular commodity . A break
sometimes is necessary but it should be a short break .
4) Mental condition of a consumer must remain normal during the period of
consumption.

Q2.)WHAT IS BUDGET LINE?WHAT IS THE ROLE IN THE DETERMINATION OF

CONSUMER’S EQUILIBRIUM?

 The Budget Line, which is also known as Budget Constraint exhibits all the combinations
of two commodities that a customer can manage to afford at the provided market prices
and within the particular earning degree.
 THE budget line is the graphical delineation of all feasible combinations of two
commodities that can be brought together with provided income and cost so that the price
of each of this combination is equivalent to the monetary earnings of the consumer.
 The slope of the budget line is equivalent to the ratioof the cost of two commodities
 The two basic elements of a budget line are the consumer’s purchasing power and the
market value of both the products.The budget line and the indifference curve both are
necessary for consumer equilibrium
 Some features of budget lines are as follows- If the line is downward i.e. a negative slope
then it shows a negative correlation between two commodities. If it’s a straight line then
it indicates a continuous market rate of exchange of an individual combination. Real line
income denotes the income and the spending size of the consumer.
 And also tangent to indifference curve is the point where the indifference curve meet the
budget line and this point is called the consumer’s equilibrium.
 There are certain assumptions made for the budget line which are as follows-
1. It is assumed that the consumers purchase only two commodities
2. The buyer’s income is limited and it is designated to buy only two products.
3. Market price which is the cost of each commodity known to the consumer
4. The expense is similar to the income of the consumer.
 A shift in budget line is due to the change in price and change in income of the consumer
 Shift due to change in price – The product amount either increases or decreases from time
to time. For e.g. if the price and income of product A remains constant and the price of B
decreases then automatically the buying potential of B will increase.Similarly if price of
B increases other factors remaining same then the demand For B would decrease.
 Shift due to change in income – High income means high purchasing power and low
income means low purchasing power which makes an ultimate shift in the budget line.
 Budget line basically depends upon the income of the consumer and the two commodities
which the consumer buys from his income.
 Equation of budget line comprises of price and quantity demanded of two consumers
which is equal to the total income of the consumer.
 Equilibrium means a state of satisfaction .
 Consumer’s equilibrium is a situation when he spends his income on one or more
commodities in such a way that he gets maximum satisfaction and has no urge to change
this level of consumption .
 Consumer’s equilibrium in case of a single commodity is marginal utility of a commodity
in rupees which is equal to the price of the commodity in rupees.
 Budget line along with the indifference curve gives consumer equilibrium . A change in
the budget line gradually affects the consumer’s equilibrium.
SUBMITTED BY:

TETIKSHA SHREE

19FLICDDN01130

BBA –LLB (Hons.)

SECTION -B