UTILITY

Utility refers to want satisfying power of a commodity. In objective terms, utility may be defined as the amount of satisfaction derived from a commodity or service at a particular time. Assumptions: UH:\Games.exetility can be measured. Marginal Utility of money remains constant No change in income of the consumer, his taste & fashion to be constant No substitute Independent marginal utility of each unit of commodity

Utility Characteristics: Utility is subjective/not measurable Utility is variable Utility is different from usefulness No legal or moral connotations Marginal Utility (MU)
The word Marginal means Border or Edge. It is the addition made to the total utility by consuming one more unit of a commodity.

Total Utility (TU)

Total Utility refers to the total satisfaction derived by the consumer from the consumption of a given quantity of a good. TU = Sum of all MU Relationship between TU and MU I. TU=sum of MU II. TU increases so long as MU is positive. III. When MU is zero, TU is maximum IV. When MU is negative, TU is diminishing. * The exponents of the utility analysis have developed two laws which occupy a very important place in economics theory and they are :# Law of Diminishing Marginal Utility # Law of Equi-Marginal Utility

Law of Diminishing Marginal Utility

The additional benefit 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 Equi-Marginal Utility

The consumer will spend his money income on different goods in such a way that marginal utility of each good is proportional to its price

Consumers equilibrium
Consumer will attain its equilibrium (maximum satisfaction) at the point, where marginal utility of a product divided by the marginal utility of a rupee, is equal to the price. Consumers equilibrium = Marginal utility of a product Marginal utility of a rupee = its price

CONSUMERS EQUILIBRIUM IN ONE COMMODITY CASE

Consumer is in equilibrium when he gets maximum satisfaction. He will get maximum satisfaction if MU of a commodity in money terms is equal to its price. CONDITIONS OF CONSUMER EQUILIBRIUMSS Px=MUx Since it is difficult to compare MU of a good (expressed in utils) with its price (expressed in Rupees) therefore MU of a good is converted into MU of a Rupees. By using following formula; MUx MUx Px= ------------------ or MUm= ----------------

SCHDULE
MU of Rs= 2. Mum No.of orange MU (utils) 1 2 3 4 10 8 5 2 Px MU (Money) Price of Orange Gain 5 4 2.5 1 1 1 1 1 4 3 1.5 0(equilibrium)

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Consumer equilibrium in two commodity case

Consumer will be in equilibrium if he allocates his expenditure so that the utility gain from the last Rs Spent on each commodity is equal. Law of DMU is extended to many goods because he buys many goods which the consumer buys with his income. MUx MUx Px= ------------------ or MUm= ---------------Mum Px MUy MUy Py= ------------------ or MUm= ---------------Mum Py MUx MUy ----------------- = ----------------Px Py Equa 1

Schdule in two commodity case

Units 1 2 3 4 5 6 M=24 MUx (utils) 20 18 16 14 12 10 Px=2 Py=3 MUy (utils) 24 21 18 15 12 9 MUx/Px 10 9 8 7 6 5 MUy/Py 8 7 6 5 4 3

Px . X + Py . y=M 2(6)+3(4)=24

Indifference curve
A curve which is a diagrammatic presentation of indifference set. It shows different combinations of two commodities between which a consumer is indifferent. Each combination offers him the same level of satisfaction.

Budget line:
Budget line is a line showing different combinations of two goods which a consumer can buy, given his income.