What is utility?

Want satisfying power of

commodity is called utility.

“utility is the quality in

commodities that makes
individual want to buy the”-
Robinson.
Features
 Itis subjective
 Utility is relative.
 Utility is not essentially
useful
 Utility is independent of
morality
Concepts of utility
 Initial utility- utility derived from the unit
of a commodity.
 Total utility- aggregates of utilities from
consumption of different units of
commodity.
 Marginal utility-change in TU by
consumption of an additional unit of a
commodity.
 Average utility-obtained by dividing TU by
no. of units of commodity.
 TYPES OF UTILITY

CARDINAL ORDINAL
UTILITY UTILITY
CARDINAL UTILITY ANALYSIS
 According to this, utility can be
measured
In cardinal numbers
unit of measurement-UTILS
 Cardinal utility
analysis

According to this, utility

can be measured in
cardinal numbers.

Unit of measurement-
utils
Relation between TU,MU &
AU.
UNITS TU MU AU
0 0 0 0
1 8 8 8
2 14 6 7
3 18 4 6
4 20 2 5
5 20 0 4
6 18 -2 3
LAW OF UTILITY
ANALYSIS

LAW OF LAW OF
DIMINISHING EQUI
MARGINAL MARGINAL
UTILITY UTILITY
Law of Diminishing
Marginal utility

 The additional benefit which a

person derives from a given stock
of a thing diminishes with every
increase in the stock that he
already has.
ASSUMPTIONS
 Utility can be measured in cardinal
numbers
 Mu of money remains constant.
 Mu of every commodity is independent.
 There is continuous consumption of
commodity.
 There is no change in income,T&P &
price of substitute goods,etc.
Exceptions to Law

 Curious and rare things.

 Good poem & books.

IMPORTANCE
 Basis of law of demand.
(why does demand curve slopes
downwards.)
 Basis of law of equi MU

(does not spend on one commodity)

 Basis of price determination

(price = MU)
Diamond water paradox
 According to this ,price of
commodity is influenced by its
MU-since water is available in
plentiful quantity , its MU is low or
even zero.
As diamond being scarce
commodity MU is high.
 Law of Equi marginal utility
 The law states that in order to get maximum
satisfaction, a consumer should spend
limited income on different commodities in
such a way that the last rupee spend on
each commodity holds him equal MU.
Also, it is a law of maximum satisfaction.
A consumer gets maximum satisfaction
when the ratio of MU of all commodities
&their price is equal.
MU1/P1=MU2/P2=MU/P3
If prices are equal then
MU1=MU2=MU3
Assumptions
 Cardinal measurement of utility is
possible.
 Income of consumer remains constant.
 Consumer is rational
 Consumer can spend his income in
small units of money say Re.1
 Price of commodity remains constant.
 Law of Equi marginal utility
Goods x Goods Y
Units of MU(Utils)
money Units of money MU(Utils)
spent spent (Rs.)

1 60 1
50
2 55 2
45
3 50 3
40
4 45 4
35
5 40 5
30
6 35 6
25
7 30 7
20
limitations
 It is assumed that the consumer spends
very small amount of money on different
commodities.
 The law assumes that utility can be
measured.
 The law assumes that the
fashion,T&P&income of people remain
constant.
 The law is not applicable in case of
complementary goods
 Practical importance
for the law.
Consumption-how should a consumer spend his income
to maximize satisfaction.
Production-the producer combines the various factors
in such a manner that marginal returns from different
factors are equalized
Exchange-utility derived from extra unit of commodity
consumed becomes equal to utility lost from the extra
unit
Distribution & price determination
Public finance
COND……
 Distribution & price determination-the producer will
employ various factors till the point,where the cost of
employing each one of them equals their marginal
productivity.

 Public Finance-welfare state has to push up public

expenditure in various directions upto a point, such that
MU are equal in all of them to ensure maximum social
benefit & rates of taxation(marginal sacrifice of all tax
payers are equal)