UTILITY

ANALYSIS
BBA 107 : Business Economics
 LEARNING
OUTCOM ES

s.no LEARNING OUTCOME po co kl

1 Students will be able P01 C02 K4
to understand the
concept of ordinal
utility, total utility and
marginal utility
2 To be able to PO1 C02 K4
understand the
concept of EQUI-
MARGINAL UTILITY
LAW.

BBA 107 : Business Economics

 learning objectives

cardinal utility Approach

Law of diminishing marginal utility

Derivation of Total utility, marginal utility, average utility

Assumptions of Law of marginal utility curve

law of equi marginal utility

Assumptions & limitations of law of equi marginal utility

BBA 107 : Business Economics

 CARDINAL UTILITY APPROACH
The Cardinal Utility approach believe that utility is measurable, and
the customer can express his satisfaction in cardinal or quantitative
numbers, such as 1,2,3, and so on

The neo-classical economist developed the theory of consumption

based on the assumption that utility is measurable and can be
expressed cardinally. And to do so, they have introduced a
hypothetical unit called as “Utils” meaning the units of utility. Here,
one Util is equivalent to one rupee and the utility of money remains
constant. BBA 107 : Business Economics
LAW OF DIMINISHING MARGINAL UTILITY (DMU)
WHAT IS MARGINAL UTILITY?
Marginal Utility is the additional satisfaction or benefit (utility) that a
consumer derives from buying an additional unit of a commodity or service.
Marginal Utility is the change in Total Utility due to a one-unit change in the level of
consumption.

MU = CHANGE IS TU
CHANGE IN Q

OR

M U = TU N – TU N-1

BBA 107 : Business Economics

LAW OF DIM INISHING M ARGINAL UTILITY (DM U)

The Law of DMU states that when more and more

units of a commodity are consumed, the utility
derived by consumption of each successive unit
goes on diminishing, other things being constant.

BBA 107 : Business Economics

TU, MU AND AU SCHEDULE

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TU, MU AND AU CURVE

BBA 107 : Business Economics

 A S S U M P T IO N S
The consumer is as su m ed to be ra tio na l.H eaims at maximizing
utility, given his income.
The consumer has perfect knowledge about the product and its
marginal
utility.
Cardinal Utility- utility can be quantified and measured.
The utilities of different commodities are independent of one
another.
There must be a continuous consumption process.
All units of the commodity must be homogeneous.
No change in consumer behavior.
BBA 107 : Business Economics
 LAW OF EQUI-MARGINAL UTILITY
The Law of Equi-Marginal Utility is an extension to the law of diminishing marginal utility. The
principle of equi-marginal utility explains the behavior of a consumer in distributing his
limited income among various goods and services.

In order to maximize satisfaction with a limited amount of money a consumer has to

compare the satisfaction obtained from each rupee that he spends on different commodities.
In other words, we substitute some units of the commodity of greater utility for some units of
the commodity of less utility.
The result of this substitution will be that the marginal utility of the former will fall and that of
the latter will rise, till the two marginal utilities are equalized.
That is why the law is also called the Law of Substitution or the Law of Equi-marginal
Utility.
BBA 107 : Business Economics
 For Example:
Suppose chocolates and ice-creams are two purchasable goods. Suppose
further that the consumer has Rs. 70 to spend. Let us spend Rs. 30 on ice-
creams and Rs. 40 on chocolates.
What is the result?
The utility of the 3rd unit of ice-creams
is 6 and that of the 4th unit of
chocolates is 2. As the marginal utility
of ice-cream is higher the consumer
would buy more of ice-creams and less
of chocolates.
BBA 107 : Business Economics
 ASSUMPTIONS
There is no change in the price of the goods or
services.
The consumer has a fixed income.
The M U of money is constant.
A consumer has a perfect knowledge of utility.
Consumer tries to have maximum satisfaction.
The utility is measurable in cardinal terms.
A consumer has many wants.
BBA 107 : Business Economics
 LIMITATIONS

Ignorance- If the consumer is ignorant or blindly follows custom or fashion, he will make a wrong use
of money.
Inefficient Organization- Inthe same manner, an incompetent organizer of business will fail to
achieve the best results from the units of land, labor and capital that he employs. This is so because
he may not be able to divert expenditure to more profitable channels from the less profitable ones.
Unlimited Resources - The law has obviously no place where this resources are unlimited, as for
example, is the case with the free gifts of nature.
Hold of Custom and Fashion - This is especially true of the conventional necessaries like dress or
when a man is addicted to some intoxicant.
Frequent Changes in Prices-The consumer may not be able to make the necessary adjustments in
his expenditure in a constantly changing price situation.

BBA 107 : Business Economics

 ORDINAL UTILITY APPROACH
The basic idea behind ordinal utility approach is that a consumer keeps number of
pairs of two commodities in his mind which give him equal level of satisfaction. This
means that the utility can be ranked qualitatively.

The ordinal utility approach differs from the cardinal utility approach (also called
classical theory) in the sense that the satisfaction derived from various commodities
cannot be measured objectively.
This approach also explains the consumer’s equilibrium who is confronted with the
multiplicity of objectives and scarcity of money income

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 Key learning
•Concept of utility
•Types of utility Approach
•Relation Between TU,MU &AU.
•Law of marginal utlity

BBA 107 : Business Economics

 References
:
•D.N. Dwivedi, D.N. (2018). Essentials of
Business Economics, Vikas Publishing House.
•Chaturvedi D.D. (2018). Essentials of Business
Economics, Scholar Technical Press, New Delhi.
“Business Economics”Microeconomic Analysis -Dr.H L
Ahuja,revised edition 2019, S. Chand Publishing.

BBA 107 : Business Economics