Professional Documents
Culture Documents
0 Q
Marginal Utility
MU
0 Q
Why ?
1. Even though human wants are unlimited, yet
particular want can almost be fully satisfied.
Hence when consumer consumes more and
more of a commodity, his want is satisfied and
he does not desire further increment of the
commodity
2. Goods are imperfect substitutes for one
another. Different commodities satisfy different
wants. When a consumer goes on consuming a
commodity, the marginal utility falls as his want
is satisfied. But if the commodity could be
substituted for other commodities, it would
have satisfied other wants. Hence its marginal
utility would not have decreased even though
its quantity increases.
Limitations
Suitable units
Suitable time
Normal persons
Rare collections
Not applicable to money
Consumer’s Equilibrium
(One commodity)
Consumer will purchase the successive
units of a commodity till marginal
utility of the commodity becomes
equal to price
The equality between marginal utility
and price indicates the position of
consumer’s equilibrium when only
one commodity is being purchased
and consumed
Equilibrium Conditions
(More than one commodities)
For a rational consumer, utility gets
maximized only when he chooses that
bundle of goods from the available
alternatives, which gives him highest level
of satisfaction
Consumer allocates his total income is
purchasing of various goods in such a
manner that he acquires the same level of
marginal utility per rupee he spends on
every good
MU1 = MU2 = MU3 = …….MUn = Mum
P1 P2 P3 Pn
Diagrammatic Representation
MU
Loss
Gain
MUa MUb
A a a’ B
O b b’
Why Demand Curve Slopes Downward ?
When the price of the good falls, the
consumer buys more of the good so as to
equate the marginal utility to lower price.
A price falls, consumer can afford to buy
more. He is able and willing to buy more
because things being cheaper, his real income
increases
When the commodity become cheaper, it
tends to be substituted wholly or partly for
other commodities.
A commodity tends to put to more uses or
less urgent uses when it becomes cheaper
Old buyer buy more and new buyer enter the
market
Substitute and Complementary Goods
Water
Diamond
Price W Price D
MU MU
P
MU
MU
0 W 0 D
Consumer Surplus
First introduced by Marshall
Consumer surplus measures the difference
between what a person is prepared to pay for a
commodity and the amount he actually pay.
Price
& A
MU p1
p2
P N
r1 r2
B
0
q1 q2 Q Quantity
Application of the Consumer Surplus
The concept of consumer surplus is
useful in designing various
government policies and programs
It is used to evaluate the effects of
various policies on consumers
Application of Consumer Surplus
Price
D Producer Surplus
Loss in consumer
B surplus = P1ABP0
P0 Producers surplus =
E
P1P0EA
Dead weight loss = AEB
D’
0 Q1 Q0 Quantity
Numerical
Consumption TU TU TU
Cheese Fish Meat
1 70 80 160
2 60 3 80 2 130 2.6
4 35 1.75 40 1 100 2
6 20 1 30 0.75 60 1.20