Internal Continuous Evaluation

Tutorial – SEM III

Name – Ananya Annapurna
PRN – 20010223171
Group III
Division D
Course – Economics
Question 1:
After a long run, you get home and are really thirsty. You pour a glass of water
and take the first sip that is very refreshing and satisfying. As you continue
drinking the water, your satisfaction decreases. Discuss the concept that
explains the common experience of every consumer according to the given case
with the help of a schedule and explain the relationship between the variables
used.

Answer:

INTRODUCTION:

Consumers make all kinds of decision – they can choose to drink coke or pepsi,
or neither, go to the park or the mall, buy the best computer equipment and so
on. It is a general assumption in economy that when a consumer makes a
choice, they are motivated to maximize their utility – the total satisfaction that
they derive from the goods and services that they consume. But it is next to
impossible to express in a quantitative form which commodity did one like better
than the other, in terms of satisfaction. This is why Economists came up with the
concept of Utility.

CONCEPT OF UTILITY:

Utility can be defined as the want-satisfying power held by a certain product or

commodity. Utility is the actual or expected satisfaction one obtains from the
consumption of a certain commodity. It is a subjective concept and differs from
person to person and place to place and time to time. Prof. Hobson defined
utility as, “the ability of a good to satisfy a want.”

Utility is measured in the same way as weight and height are measured. Another
assumption taken is that they can be measured using cardinal or numerical
terms. By using these it is possible to numerically estimate utility, which a
person derives from the consumption of goods and services. Each unit is named
as an UTIL.

TOTAL AND MARGINAL UTILITY:

Total Utility: the total satisfaction resulting from the consumption of all possible
units of a product. For example: If the 1st gulp of water gives you a satisfaction
of 20 utils, and the 2nd one gives you the satisfaction of 16 utils, then the total
utility derived from drinking 2 gulps of water is 36 utils.

So, TUn=U1+U2+U3+….+Un

Where, TUn = Total Utility obtained from n units of the product.

Marginal Utility: the marginal, or additional satisfaction resulting from consuming

one more unit of that product. It is the rate of change in satisfaction gained from
consumption, as a result of a change in consumption.

It can be represented as: MUx = TUx – TU(x-1)

Marginal Utility: If after the 2nd gulp of water, one drinks the 3rd gulp, then the
TU increases from 36 utils to 44 utils. The additional 9 utils is the MU.

LAW OF DIMINISING MARGINAL UTILITY:

Law of Diminishing Marginal Utility (DMU) states that:

The utility of any consumer derives from successive units of a certain

commodity, consumed over a certain period of time, diminishes as total
consumption of the commodity increases. [holding the consumption of all other
products constant].

This law expresses an important relationship between the utility and the quantity
consumed of a commodity.

Example: You have just arrived at your grandmother’s house and she gives you
a plate of chicken biriyani. The first plate will give you great satisfaction. The
second plate will give you relatively less satisfaction. The third, even lesser. A
moment will come wherein you won’t be able to eat anymore. Such a secrease in
satisfaction of successive units occurs due to the Law of DMU.

ASSUMPTIONS OF LAW OF DMU:

1. Utility can be measured in the form of utils.

2. Utility of different products are not dependent on each other.
3. MU of Money is constant.
4. Units of commodity must be of same quality, and there must be no gap in
the consumption, or change in the commodity itself.
5. Fashion, tastes and preferences remain constant. So does the income of
the consumer.
6. The consumer has the perfeck knowledfe about the different goods and
how his income is to be spent and utility is to be maximised.
7. The consumer is rational

LAW OF DIMINISHING MARGINAL UTILITY: SCHEDULE

Let us continue with our water drinking example (as is given in the question)
that:
Amount of Glasses of Water Total Utility Marginal Utility
Consumed

One glass 25 25

Two glasses 40 15

Three glasses 50 10

Four glasses 55 5

Five glasses 55 0 (POINT OF

SATIETY)

Six glasses 50 -5

Here, as I drink one after the glass of water, the total utility reaches to the
maximum point, the point of satiety, after which it begins to fall. So I reach my
satiety at the fifth glass of water. Thereafter, there is a decrease in the total
utility, and the marginal utility becomes negative.

For the above schedule, this is the graph:

From the graph we can conclude that:

  On X-Axis we have taken one glass of water as each unit. On Y-axis we
have 10 utils per unit.
 TU = Total Utility Curve, MU = Marginal Utility Curve.
 Total Utility increases upto point H, which is the maximum – the point of
satiety, and then falls.
 O is the point where the marginal utility is ZERO. MU=0, when
TU=Maximum.
 When TU starts falling, MU becomes negative.
 The graph for TU upward sloping upto point H, after which it becomes
concave.
 The graph for MU is downward sloping.

CONCLUSION:

From here we can conclude that, according to law of diminishing marginal utility,
no matter how thirsty I am, there will come a point where I am completely
satisfied and won’t any longer want more water.

QUESTION 2: Explain the movement or shifts in supply of a commodity in each

of the following cases

a) The government subsidies are increased to plant a specific crop

A subsidy is a payment made to consumers or firms in order to increase
output. A subsidy for farmers to plant a specific crop will reduce the cost
of production of that crop and will increase its supply. Thus, in the given
graph, the supply will increase from Q1 to Q2, shifting the curve from S1
to S2 at the same price P.

b) Government has provided subsidies to the farmers for the production of

crops
A subsidy for farmers to do agriculture in general will reduce the cost of
production of that crop and will increase its supply. Thus, in the given
graph, the supply will increase from Q1 to Q2, shifting the curve from S1
to S2 at the same price P.
c) Price of the X commodity increases
As the price of the commodity is increasing here, it is a MOVEMENT along
the supply curve instead of a mere shift. When the price rises to OP1,
quantity rises also rises to OQ1 – known as EXPANSION in SUPPLY. This
leads to an upward movement from A to B along the same supply curve
SS.

d) The rates of wages given to labor has decreased

The rate of wages have decreased then the producer will save up more
cost of production. So cost of production will decrease and hence, supply
will increase. Supply rises from OQ to OQ1 at the same price of OP. The
result is a rightward shift from SS to ZZ1.
e) Transport facilities have improved in the country
This means that there has been an upgradation of technology. Advanced
and improved technology reduces the cost of production and raises the
profit margin. Supply rises from OQ to OQ1 at the same price of OP. The
result is a rightward shift from SS to S1S1.