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mod3- utility
mod3- utility
mod3- utility
Study
Module 3
Some basic Questions about
consumers
It is subjective
Depends on the mental attitude & emotions
of consumers.
Has no physical or material existence.
Higher the price, greater the utility.
eg: buying an original movie DVD and buying a
pirated movie CD
Different Types of Utility
Form utility
Time utility
Place utility
Service utility
Utility vs. satisfaction
Utility Satisfaction
Refers to expected Refers to the
satisfaction in contentment realized
consumption of after consuming a
product. product.
Related to the pre - Related to the stage
purchasing stage after purchasing
Measured by the price Cannot be measured
paid for the product. by the price paid to the
product.
Theories of Consumer Choice
3 10 30 excellent
5 10 50 Highly
uncomfortable
The Law of Diminishing Marginal
Utility
According to Marshall, “ the additional benefit which a
person derives from a given increase of his stock of a
thing diminishes with every increase in the stock that
he already has”.
Law of demand
Consumer surplus
Value paradox (the value in use & the value in
exchange are different.
Diamond has great value in exchange coz of its
limited ss, value is high as it offers greater
utility. But water has greater value in use as it is
abundantly available but no value in exchange.)
Taxation
Criticisms to the law
The law suffers from the criticism that utility is
subjective in nature and can not therefore be
measured objectively.
Money gives consumer increasing marginal utility
but not constant marginal utility.
Continuous consumption may not be possible in
practice.
Limited physical capacity of human.
Ordinal approach to utility
40 7 160 3
30
8 160 0
20
10 9 155 -5
0
1 2 3 4 5 6 7 8 9 10 11 10 145 -10
-10
-20 145
Types of Marginal utility
Budget line
0 8 0 8000 8000
5 7 1000 7000 8000
10 6 2000 6000 8000
15 5 3000 5000 8000
20 4 4000 4000 8000
25 3 5000 3000 8000
30 2 6000 2000 8000
35 1 7000 1000 8000
40 0 8000 0 8000
Budget Line
Y
I/Py
O I/Px
Indifference curves
Perfect complements'
indifference curves are right-
angled.
Perfect complements refer to
goods that can't be consumed
without each other.
For example, to drive a diesel
car, you need diesel.
Perfect Substitutes Indifference Curve
10
Consumption of pepsi
U = 25
5
U = 12.5
Budget line
1
U=1
1 2.5 5 x1
Consumption of pizza
Here, consumer obtains equilibrium as the
budget line becomes tangent to the
indifference curve.
But when consumer’s income increases, his
budget line also shifts to right and become
tangent to higher level of indifference curve.
When his income decreases, his budget line
moves towards left and become tangent to
lower level indifference curve.
Consumer Surplus
Consumer surplus is a measure of the difference
between the amount of money a person was willing
to pay to buy a quantity of good and the actual price
they paid.
This measure is used as a tool in policy analysis.
Consumer surplus is represented graphically as the
area underneath the demand curve above the price
paid for the goods.
Consumer Surplus
Consumer Surplus - the difference between the
price buyers pay for a good and the maximum
amount they would have paid for the good.
Example:
• I’m willing to pay Rs.60 for a bottle of Diet coke
• Diet coke is on sale for Rs.50 per bottle
• Consumer surplus = Rs.10
Numerical examples
Julie has a monthly income of $200, which she
allocates between two products such as Meat
and Potato. Suppose meat costs $4 per pound
and potato costs $2 per pound, draw her budget
constraints.
For M = 0
50 – 0.5P = 0
Therefore, P = 50 / 0.5
P = 100 units
If P = 0, M will be
M = 50 – 0.5(0)
M = 50 units