BUSINESS ECONOMICS

UTILITY ANALYSIS
Meaning:
Utility it means capacity of a commodity to satisfy only needs and
wants. It is satisfaction derived from consuming a commodity again, it is
difficult to compare the satisfaction derived by two different consumers
on consuming a commodity
Definition
“It is the want satisfying power of a commodity or a service which
determines the demand for commodity is called utility”
- Stenley Jevons.
Total Utility
Total utility is the amount of satisfaction derived from conception
of position of a good. It refers to some total of utility derived from
consuming several units of a commodity at a given time.
Table
No. of Biscuits consumer Total Utility
1 15
2 27
3 36
4 42
5 45
6 45
7 43
8 39
9 34
 10 27
Total Utility curve

Y-Values
50

45

40

35

30

25

20

15

10

0
0 2 4 6 8 10 12

Features of Utility
1.When more and more units of a commodity or consumed within
a specified time period. The total utility derived time of increase at a
decreasing rate.
2.At the top of the total utility curve, the consumer attains
equilibrium and indifferent.
3.If the maximum Utility is attained ever additional unit consumed
results in decreasing the total utility.
Marginal Utility
Marginal utility is the change in total utility associated with a unit
change in consumption. It is the change in total utility resulting from a
one unit change in the consumption of the goods in quasi per unit of
time.
Table
No. of biscuits consumed Marginal utility
1 15
2 12
3 9
4 6
5 3
6 0
7 -2
8 -4
9 -5
10 -7
Marginal Utility curve

Y-Values
20

15

10

0
0 2 4 6 8 10 12

-5

-10

Features of Marginal Utility

1.For every additional unit consumed the marginal utility diminishing.
2.After certain unit the marginal utility becomes negative.
3.The profit at which consumer attain equilibrium. The marginal utility is
zero.
4.The value of marginal utility can be positive, negative or zero
 LAW OF DIMINISHING MARGINAL UTILITY
Introduction:
The law of diminishing marginal utility was introduced by the
French engineer gossan. It deals with the satisfaction of consumers.
The basic principles of this law are the desire for consuming a particular
commodity diminishes. The consumer more it indicates the marginal
utility of consuming successive commodity falls.
Table:
No of biscuits Total utility Marginal Utility
consumed
1 15 15
2 27 12
3 36 9
4 42 6
5 45 3
6 45 0
7 43 -2
8 39 -4
9 34 -5
10 27 -7

The different features of total and marginal utility and their inter
relationships it is found the among
1.Marginal utility can be positive, zero even negative.
2.The marginal utility reducing constantly
3.The total utility is positive up to (satisfy) satisfy
4. The marginal utility is negative the total utility started decrease.
 50

40

30

20

10

0
0 2 4 6 8 10 12

-10

Assumptions of the law of diminishing marginal utility

1.Expressed numerically: the utility (satisfaction) derived from
consuming a commodity can be measured mentioned numerically such
as 1, 2, 3 … etc.
2.Homogoneous units of commodity: The units consumed must
possesses the same quality and characteristics there should not be any
change in the features of the commodity like taste, flavors, colour,
shapes, etc.,
3.Same consumer: The consumer who is consuming the
successive units must be the same person. If there is any change in
consumer the law of does not work.
4.No change in its price or its competition: The law assumes that
the price of the commodity remains unchanged.
5.No change in tastes and preference of a consumer: Any change
in the consumers tastes and preferences will affect the purchasing
ability of the consumer.
Importance of the law of diminishing marginal utility
1.Law of Demand:
The law of demand indicates that the demand of a commodity
increases when the price decreases and vice versa. This is based on the
diminishing marginal utility as it provides the bases of foundation for
the loss of consumption. A consumer. The bases that the consumer will
get Lenser utility for succussing unit and hence he will be willing to play
lens to additional unit.
2.Basis for the law of consumption:
The law of diminishing marginal utility provides a foundation for
the losses of consumption a consumer never spends his total income
are on a single commodity. This is because every additional unit of a
commodity yields less utility.
3.Consumer surplus:
Consumer surplus in the different between the amount of willing
to pay and the market value of the commodity. This consumer surplus
is also utilizing the concept of diminishing marginal utility. For example,
when a consumer is thirty in a summer, they might be willing of pay
much more than Rs10 for a soft drink.
4.Progressive income tax:
The law of diminishing marginal utility has also been argues that it
had played a significant role in finance minister of a country while
framing suitable taxation policy. This idea is mainly given be to the
marginal utility income increases.
5. Fixation of price:
The price fixation mainly depends on demand and supply of a
commodity the demand (deal) in turn determined by its marginal utility
suppose a seller price to sell more quantities of a commodity the price
should be fixed low and vice versa.
6. Creating opportunity to choose among varies:
The producers age forced to produce more variety of a products
as the marginal utility of a particular product diminishes and not able to
sell more. Thus, the consumer is figured as more variety of products are
available.
7. Bases for the principle of socialism:
The principle of socialism states the income and wealth must be
distributed equally the law of diminishing marginal utility supports to
this principle as the marginal utility of money decreases for the rich and
it is high for the poor.

Exceptions to a operation of law:

1.Hobbies:
There is an argument that low of diminishing marginal utility
(wants) wouldn’t 2on’t work for office of individuals like listening music
watching television collecting stamps. Etc. The utility certainly
decreases if they are asked to listen to the same music for several time.
Watch the same television program repeatedly and to collect same
stamp repeatedly.
2. Liquor:
Some argues that consuming liquor for several time will increase
satisfaction and utility instead of diminishing. They argue that this law
does not apply in the case of liquor. He only think is individuals differ in
the level of units consumed. This standard unit might be a peg for one
individual but one full bottle for another individuals.
3. Money:
This strong arguments against the applications of diminishing
marginal utility for money. They argue that nobody retunes to receive
money and the utility for money is constant for all money. The value for
money decreases if the more and more money possessed by an
individual.
4. Telephone connections:
There is another mis-connection about the application of this law
some argues that if the ‘x’ as telephone connection and his satisfaction
increases instead of decrease for every additional connection in the
city. For Example, There connection is that if the city connections
50,000 can communicate with 50,000 householders and if the num er
of connection rises to 1,00,000 householders, the utility derived by
x will be increased has he can communicate with 1,00,000 households
now.
 INDIFFERENCE CURVE ANALYSES
Introduction
The indifference curve was first outlined by English economist’s
professor F.Y. Edge worth. The analysis broad to extensive gives by a
board to extensive gives by an Italian economists pareto in 1915, Eogen
smutsay improved the concept for their, In 1934, popularist in “a
consideration of Theory of value” by who English economist R.G.D Allen
and J.R. Hicks. Later J.R. Hicks developed the concept further and
deve43loped and consumer demand based on indifference curve
analysis in is different curve analysis in this famous book,
“Value and capital published in the year 1939”.
ASSUMPTIONS OF INDEFFERENCE CURVE ANALYSIS
1.Rational consumer
Consumers are rational in nature and aims at maximizing the
satisfaction with available income and know market price of
commodity.
2. Ordinal measurement of Utility
It is assumed that the utility derive from combination of
commodities can be compared and they can be ranked according to the
consumers scale of (difference) complete.
3.Consumers have complete knowledge:
Consumer possess complete knowledge about the utility of
commodities marked price, etc.,
4.Transivity:
 The consumer prefers A to B, B to c then must prefer A to c, Thus
the differences is transitivity to other commodities also.
5. Constant market price:
The market prices of commodities do not change and remain
constant.
6. Constant disposable money
The consumer has a fixed amount of money to spent on two
commodity and there is no savings out of it and no change in the
disposable income of the consumer.
7. scale of difference Independent of market price:
Consumer’s scale of preference does not consider the market
price of the scale of preference is independent of market price (or)
features

CHARACTERISTICS (0R) FEATURES OF INDIFFERENCE CURVE

1.Solpe downward
The Indifference curve always slope downwards from left to
right. The curve cannot be upward vertical or Horizontal curve.
 A and B it suggest that the additional unit of why has no utility at
all. If it is so no consumer will prefer buying additional unit of y. Hence,
IC cannot be vertical in shape.
2. Horizontal Indifference curve
Horizontal indifference curve means the quantity of commodity
why remains constant which implics that the consumer is indifference
to get more commodity without giving up any unit of commodity why
shich is not possible.
3. Indifference curve sloping upward
If the indifference cure sloping upword the consume is indifferent
between fiver unit of both the commodity to more units of both the
commodity.

4. Concave curve
The shape of the curve must be convex to orign if the indifference
cur e concave to the origin the marginal rate of subsitution is increasing
which is not possible.

5. Straight line Indifference curve

 Indifference curve cannot be straight line this is because straight
line indicates that the marginal rate of subsitution is equal.

UNIT 4
PRODUCTION FUNCTION
Production :
Production is an important economic activity which satisfies the
wants and needs of the people production function brings out of the
relationship between inputs used and the resulting output. The firm has
to designed as to how much input factors (Labor and capital) to
employee to produce efficiently
Concept of production :
It involves transforming resources such as labor power, saw
materials and the services provided by facilities and machines into
finished products production refer to all of the activities involved in the
production of goods and services from (following) borrowing to setting
up of expansion of production facilities to hiring workers, purchasing
raw materials running quality control and so no
Factors of production:
1.Land:
Land is heterogeneous in nature. The supply of land is fixed and it
is a permanent factor of production but it is productive only with the
application of capital & labor.
2. Labor:
The supply of labor is inelastic in nature but it defers in
productivity and efficiency and it can be improved.
3. capital:
Its a manmade factor and is mobile but the supply is elastic.
4. Organization:
The organization plans, supervisions, organizers and control the
business activity and also takes risks
Production Function
Meaning
The production functions is a represses enations of the various
technological receipts, alternate draft which a firm can choose to
coagulate its production process. It particular the production function
tells the maximum guarantee of output the firm of can produce given
the guarantees of the infinity of the flat these might employee.
The production function can be expressed as……
Q = F (L , K)
When, Q in the physical quantity of output per unit of them.
F of the functional relationship
 L is the quantity of labor used
K is the quantity of capital employs
Measures of productivity
1.Total production (TP)
The maximum level of output can be produced with given amount
of input
2. Average production (AP)
Output production per unit of input equal to
AP = Q/L

3. Marginal production (MP)

The change in total output produced by the last unit of an input.
4. Marginal production of labor (MOL)
*Q/*L
That is change in the quantity produced to a given changing the
labor
5. Marginal production of capital (MPC)
*Q/*K
That is change in the quantity produced to a given change in the
capital.
Assumptions:
1.No improvement in technology:
 The law of assumption that there is no change in technology used
this is because if the change in a inputs, the marginal and average
product might increase instead of decrease.
2. Variation in only one factor
This law assumes the only one factor varies and after other factor
on unchanged this the law does not study effect on output due to
change in all of variable’s proportion (i)
3. Various proportions can be used:
This law assumes the different proportions of input factor can be
used for production. This used for production. This law does not apply
for goods for which fixed proportion of factors is required for
production

4.Homogeneous Input
All the units are variable factors are homogeneous in nature
5.Shorter production
This law means suitable of shorten production this is because, in
long run production generally all the factors can be variable
Assumption of law of production function:
The product
1.It is related a particular unit of time
2. The technical knowledge during that period of time remain constant
3. The factors of production are divisible unit most valuable units
4. The producer is unit the best technic available.