Module -1

Marginal analysis
• Marginal analysis examines the effects of additions to
or subtraction from a current situation.
• Marginal analysis is concerned with finding out the
change in the total arising because of one additional
unit.
• Concept of marginal analysis deals with a unit increase
in cost/ revenue/utility.
• The change in the total revenue due to one additional
unit sold is known as Marginal Revenue.
• The change in total cost on account of one additional
unit produced is known as Marginal Cost.
• The change in total utility on account of one additional
•   change in the total revenue due to one additional unit sold is
The
known as Marginal Revenue.
Marginal Revenue = –
Where, is the total Revenue of n products
is the total revenue of products.

The change in total cost on account of one additional unit produced is

known as Marginal Cost.
Marginal Cost = –
Where, is the total cost of n products
is the total cost of products.

The change in total utility on account of one additional unit utilized is

known as Marginal Utility.
Marginal Utility = –
Where, is the total cost of n products
is the total cost of products.
 Utility
• People demand goods and services in an economy to
satisfy their wants.
• All goods and services have wants satisfying capacity
which is known as Utility.
• Utility ( level of satisfaction) is different from person to
person.
• In economic theory utility can be measured in two ways
 Cardinal utility analysis
 Ordinal utility analysis
Cardinal Utility analysis
• Cardinal utility analysis is based on the cardinal
measurement of utility which assumes that utility is
measurable or quantifiable ,
• i.e it can be measured in some units. According to this
approach how much utility a consumer obtains from goods
can be expressed in cardinal numbers such as 1,2,3, 4 and
so forth.
We thus have
Total utility and Marginal Utility.
Total Utility (MU) which is a measure of the overall
satisfaction.
The additional satisfaction a consumer gains from consuming
one more unit of good or service is Marginal Utility (MU).
Slices of bread Total Utility Marginal utility
1st 40 40

2nd 78 38

3rd 113 35

4th 144 31

5th 170 26

6th 190 20

7th 203 13

8th 208 5

9th 204 -4
Thus we have,

 Total utility
 Marginal Utility

Total Utility (MU) which is a measure of the

overall satisfaction.

The additional satisfaction a consumer gains

from consuming one more unit of good or
service is Marginal Utility (MU).
Ordinal Utility analysis

• Ordinal utility approach is purely subjective and is

immeasurable.
• Ordinal measurement of utility is the one in which
utility cannot be expressed in absolute units.
• Preferences among goods can be ranked using
ordinal numbers such as fist, second, third etc.
• Utility from one source may be ‘equal to’, ‘more
than’ or ‘less than’ utility from another source.
• But it is not possible to state the difference in
absolute or numerical units.
 Law of diminishing marginal utility
• The law of Diminishing Marginal Utility was perfected and
popularized by Alfred Marshall.
• The law states that as the stock of a commodity increases
with the consumer, its Marginal Utility to the consumer
decreases.
• It can eventually fall to zero and become even negative.
• If utility of a product is measured in terms of money that one
is willing to sacrifice to consume a certain amount of that
product, the law of diminishing marginal utility can be
restated.
• The more the consumption of a product, the less is the worth
of extra units of consumption during a specified period.
Marginal Utility

O Q
Diminishing marginal utility
 Production Possibility curve
• Production possibility schedule is that
schedule which shows alternative production
possibilities of two sets of goods with the
given resources and technique of production.
• Production possibility curve is a graphic
presentation of two sets of goods with the
given resources and technique of production.
 Production possibility curve
Goods A B C D E
Wheat ( lakh tones) 100 90 70 40 0
Cloth ( 1000 tones) 0 1 2 3 4

A
90 B
C
70
Wheat
D
40

E
1 2 3

Cloth