Md.

Firoz Ahmed
Economics Discipline
Khulna University
Utility:
Utility is the term economist uses for the satisfaction
consumers receive from items they acquire, activities they
engaged in, or services they use. That is pleasure or
satisfaction obtained from consuming goods and services.
Total utility:
The total satisfaction enjoyed from consuming any given
commodity.
Marginal utility:
The extra satisfaction a person receives over a given period
by consuming one extra unit of a good.
Marginal utility is the change in utility an individual enjoys
from consuming an additional unit of a good.

total utility Vs marginal utility ??

Law of diminishing marginal utility:

Assumptions:
1. Commodity is taken in suitable unit.
2. The commodity is taken within a certain time.
3. The character of the consumer remains unchanged
during the period.
4. The consumer is a normal person.
5. Income of the consumer remains constant
The law:
The Law of diminishing marginal utility states that the
marginal utility of any item tends to decline as more
as consumed over any given period.
For example, marginal utility of bread – the extra
satisfaction from each additional bread – is likely to
decline as he takes more and more of it.

The marginal utility of bread to the consumer might be

quite high if he has not eaten any at all for a long
time.
However, second bread adds less to total utility than
does the first.
Table:
Number of Marginal utility Total utility
bread
1 20 20
2 18 38
3 15 53
4 11 64
5 6 70
6 0 70
7 -8 62
8 -16 46

That is the marginal utility of a thing to anyone

diminishes with every increase in the amount of it he
already has.
 In this figure MU has been drawn which slopes downward from left to
right and this is the diminishing marginal utility curve. It shows marginal
utility declines as more bread is consumed, reflecting the fact that the slope
of the total utility curve (TU) diminishing.
Criticisms:
1. In case of rare collection the law does not hold good.

2. A change in other people stock may influence the law.

3. A change in other possessions may influence the law.

4. Utility depends on fashion too. The utility goes up when

the commodity comes in fashion. On the other hand it
goes out of fashion, utility goes down.

5. The law does not apply to money.

6. The law is not applicable for inferior goods.

Scale of preferences
All desires of a consumer are not of equal urgency or
importance. Since his resources are limited and he
cannot fulfill all his desires, he must pick and choose
more important and more urgent desires for
satisfaction.
Thus some desires take precedence of others. This how
a consumer ranks his desires and builds up a scale of
preferences. Scarcity forces him to choose.
Indifference Curve:
An indifference curve represents all combinations of
two categories of goods that make the consumer
equally well off.
Any point on a higher indifference curve is preferred
to any point on a lower one.
A Preference Map: A Family of Indifference Curves
Each consumer has a unique family of indifference
curves called a preference map. Higher indifference
curves represent higher levels of total utility.
Budget constraint
Virtually all individuals must face two facts of
economic life: (1) they have to pay prices for the
goods and services they buy, and (2) they have
limited funds to spend. These two facts are
summarized by the consumer’s budget constraint:
A consumer’s budget constraint identifies which
combinations of goods and services the consumer
can afford with a limited budget, at given prices.
Budget line:
Budget line the graphical representation of a budget
constraint. The consumer will always choose a point
on the budget line, rather than a point below it.
The budget line shows all
combinations of concerts
and movies Max could
attend by spending $150
each month. At point A,
he could attend 15
movies, but no concerts.
At F, he could attend 5
concerts but no movies.
At points B–E, he attends
both movies and concerts.
The slope of the line (P
/P3) concert movie shows
that the opportunity cost
of another concert is 3
movies.
The slope of the budget line indicates the spending trade-
off between one good and another- the amount of one good
that must be sacrificed in order to buy more of another
good. If Py is the price of the good on the vertical axis and
Px is the price of the good on the horizontal axis, then the
slope of the budget line is Px /Py.
Change in Budget line:
An increase in income will shift the budget line
upward (and rightward). A decrease in income will
shift the budget line downward (and leftward). These
shifts are parallel—changes in income do not affect
the budget line’s slope.
When the price of a good changes, the budget line
rotates: Both its slope and one of its intercepts will
change.
In panel (a), an increase in income leads to a rightward,
parallel shift of the budget line. In panel (b), a decrease in
the price of a movie causes the budget line to rotate
upward; the horizontal intercept is unaffected. In panel (c),
a decrease in the price of a concert leads to a rightward
rotation of the budget line.
The Marginal Rate of Substitution
The slope of the indifference curve along any one of its
segments tells us the rate at which a consumer is
willing to trade off one good for another and still
remain indifferent. The absolute value of this slope is
called the marginal rate of substitution, or MRS.

The MRS tells us the decrease in the quantity of good y

needed to accompany a one-unit increase in good x,
in order to keep the consumer indifferent to the
change.
Consumer’s equilibrium or maximizing satisfaction;
The optimal combination of goods for a consumer is
that combination on the budget line at which the
indifference curve has the same slope as the budget
line.

The optimal combination of two goods x and y is that

combination on the budget line for which
MRS x,y = Px / Py
Consumers will choose from among available
combinations of X and Y the one that maximizes
utility.
In graphic terms, a consumer will move along the
budget constraint until he or she is on the highest
possible indifference curve.
In this case, utility is maximized when our consumer
buys X* units of X and Y* units of Y. At point B, the
budget constraint is just tangent to—that is, just
touches—indifference curve i2.
As long as indifference curves are convex to the
origin, utility maximization will take place at that
point at which the indifference curve is just tangent
to the budget constraint.
 Where two curves are tangent, they have the same
slope, which implies that the slope of the indifference
curve is equal to the slope of the budget constraint at
the point of tangency.

Consumers will choose the combination of X and Y that

maximizes total utility. Graphically, the consumer will move
along the budget constraint until the highest possible
indifference curve is reached. At that point, the budget
constraint and the indifference curve are tangent.