Ariful Islam

Roll-05
Session-2013-14
7th Batch
 Topics:

Utility, Rationality, Choice, Price and Equilibrium

 Economics- Greek word “oikonomikos” which
can be divided into two parts
 “Oikos”
 “Nomos”
 Adam Smith Definition
 Utility, satisfaction, proposed by Daniel
Bernoulli

Types of Utility

 Total utility
 Marginal utility
 Diminishing marginal Utility
Quantity chosen Utility (pleasure) Dis-utility (pain/cost)
1 10 2
2 18 4
3 22 6
4 25 8
5 25.5 10
6 24.5 12
7 21.5 14
30

25

20 Quantity chosen

15 Utility (pleasure)

10
Dis-utility (pain/cost)
5

0 Dis-utility (pain/cost)
1 Utility (pleasure)
2
3
4 Quantity chosen
5
6
7
Quantity Marginal utility Marginal dis- Net utility
utility
1 10 2 8
2 8 2 14
3 4 2 16
4 3 2 17
5 0.5 2 15.5
6 -1 2 12.5
7 -3 2 7.5
10

8 Quantity

6
Marginal utility
4
Marginal dis-utility
2

0 Marginal dis-utility
1 Marginal utility
-2 2
3 Quantity
4
5
-4 6
7
 The model of rational decisions
 Instrumental rationality
 The equi-marginal principle
 From instrumental rationality to the equi-
marginal principle
 Utility is maximized when the equi-marginal
principle is satisfied, the instrumentally
rational person always respect this principle.