Utility means the want satisfying

power or capacity of a commodity.

 “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.”
Units Total Utility Marginal Utility
(in utils) (in utils)
10 10

18 8

22 4

22 0

20 -2
 Relationship Between Total Utility & Marginal Utility
12

10
Total Utility & Marginal Utility (in utils)

0
1 2 3 4 5

-2
MU
Units of Commodity X Consumed
-4
60 utils

100 utils
 Bhuk Lagi
Hai…Sirf Pani
Puri Chahiye…..
 Jag Ghumeya
Thaare Jaisa Na
Koi……..
 Marginal Utility of Rs.100 note

Income
 Marginal
Price (or
Units of Utility
dissatisfactio
commodity (satisfaction) Relation
n of money)
‘X’ (MUx)
(Px) (in Rs.)
( in utils)
1 10 15 MUx > Px
 Marginal
Price (or
Units of Utility
dissatisfactio
commodity (satisfaction) Relation
n of money)
‘X’ (MUx)
(Px) (in Rs.)
( in utils)
1 10 15 MUx > Px
2 10 13 MUx > Px
 Marginal
Price (or
Units of Utility
dissatisfactio
commodity (satisfaction) Relation
n of money)
‘X’ (MUx)
(Px) (in Rs.)
( in utils)
1 10 15 MUx > Px
2 10 13 MUx > Px
3 10 10 MUx = Px
 Marginal
Price (or
Units of Utility
dissatisfactio
commodity (satisfaction) Relation
n of money)
‘X’ (MUx)
(Px) (in Rs.)
( in utils)
1 10 15 MUx > Px
2 10 13 MUx > Px
3 10 10 MUx = Px
4 10 8 MUx < Px
 Marginal
Price (or
Units of Utility
dissatisfactio
commodity (satisfaction) Relation
n of money)
‘X’ (MUx)
(Px) (in Rs.)
( in utils)
1 10 15 MUx > Px
2 10 13 MUx > Px
3 10 10 MUx = Px
4 10 8 MUx < Px
5 10 4 MUx < Px
 Marginal
Price (or
Units of Utility
dissatisfactio
commodity (satisfaction) Relation
n of money)
‘X’ (MUx)
(Px) (in Rs.)
( in utils)
1 10 15 MUx > Px
2 10 13 MUx > Px
3 10 10 MUx = Px
4 10 8 MUx < Px
5 10 4 MUx < Px
 Marginal
Price (or
Units of Utility
dissatisfactio
commodity (satisfaction) Relation
n of money)
‘X’ (MUx)
(Px) (in Rs.)
( in utils)
1 8 15 MUx > Px
2 8 13 MUx > Px
3 8 10 MUx > Px
4 8 8 MUx = Px
5 8 4 MUx < Px
 Marginal
Price (or
Units of Utility
dissatisfactio
commodity (satisfaction) Relation
n of money)
‘X’ (MUx)
(Px) (in Rs.)
( in utils)
1 8 15 MUx > Px
2 8 13 MUx > Px
3 8 10 MUx > Px
4 8 8 MUx = Px
5 8 4 MUx < Px
 MU of MU of
MU of Lime
Virgin Limbu
Units Soda
Mojito Paani
(MUb)
(MUa) (MUc)
1 50 35 90
2 40 30 70
3 30 25 50
4 20 20 30
5 10 15 10
MU a MU b MU c
= = =M
Pa Pb Pc
 MU a
Units Pa
50
1 20
= 2.5

40
2 20
= 2.0

30
3 20
= 1.5

20
4 20
= 1.0

10
5 20
= 0.5
 MU b
Units Pb
35
1 10
= 3.5

30
2 10
= 3.0

25
3 10
= 2.5

20
4 10
= 2.0

15
5 10
= 1.5
 MU c
Units Pc
90
1 5
= 18.0

70
2 5
= 14.0

50
3 5
= 10.0

30
4 5
= 6.0

10
5 5
= 2.0
 MU a MU b MU c
Units Pa Pb Pc
50 35 90
1 20
= 2.5 10
= 3.5
5
= 18.0

40 30 70
2 20
= 2.0
10
= 3.0
5
= 14.0

30 25 50
3 20
= 1.5
10
= 2.5 5
= 10.0

20 20 30
4 20
= 1.0
10
= 2.0
5
= 6.0

10 15 10
5 20
= 0.5
10
= 1.5
5
= 2.0
 MU a MU b MU c
Units Pa Pb Pc
50 35 90
1 20
= 2.5 10
= 3.5
5
= 18.0

40 30 70
2 20
= 2.0
10
= 3.0
5
= 14.0

30 25 50
3 20
= 1.5
10
= 2.5 5
= 10.0

20 20 30
4 20
= 1.0
10
= 2.0
5
= 6.0

10 15 10
5 20
= 0.5
10
= 1.5
5
= 2.0
 MU a MU b MU c
Units Pa Pb Pc
50 35 90
1 20
= 2.5 10
= 3.5
5
= 18.0

40 30 70
2 20
= 2.0
10
= 3.0
5
= 14.0

30 25 50
3 20
= 1.5
10
= 2.5 5
= 10.0

20 20 30
4 20
= 1.0
10
= 2.0
5
= 6.0

10 15 10
5 20
= 0.5
10
= 1.5
5
= 2.0
Virgin Mojito 50+40 90
Virgin Mojito 50+40 90
Lime Soda 35+30+25+20 110
Virgin Mojito 50+40 90
Lime Soda 35+30+25+20 110
Nimbu Paani 90+70+50+30 250
+10
Virgin Mojito 50+40 90
Lime Soda 35+30+25+20 110
Nimbu Paani 90+70+50+30 250
+10
Total 450
 “A consumer obtains maximum total
utility with his limited income when he
spends his expenditure on different
commodities in such a way that the
ratios of marginal utility to the price
of different commodities that he
purchases, becomes equal.”
• Utility is measured in cardinal terms.
• Marginal utility of money is constant.
• Prices of commodities are unchanged.
• All the units of a particular commodity are
homogenous.
• Income of the consumer is fixed and is spent on
the given commodities.
• The consumer is rational individual seeking
maximum total satisfaction.
• The consumer knows the marginal utility schedule.
• The consumer has perfect knowledge about the
alternative choices available to him.
No. of units Marginal Price Consumer
Utility Surplus
1 20
No. of units Marginal Price Consumer
Utility Surplus
1 30 20
No. of units Marginal Price Consumer
Utility Surplus
1 30 20 10
No. of units Marginal Price Consumer
Utility Surplus
1 30 20 10
2 28 20 8
No. of units Marginal Price Consumer
Utility Surplus
1 30 20 10
2 28 20 8
3 26 20 6
No. of units Marginal Price Consumer
Utility Surplus
1 30 20 10
2 28 20 8
3 26 20 6
4 24 20 4
No. of units Marginal Price Consumer
Utility Surplus
1 30 20 10
2 28 20 8
3 26 20 6
4 24 20 4
5 22 20 2
No. of units Marginal Price Consumer
Utility Surplus
1 30 20 10
2 28 20 8
3 26 20 6
4 24 20 4
5 22 20 2
6 20 20 0
No. of units Marginal Price Consumer
Utility Surplus
1 30 20 10
2 28 20 8
3 26 20 6
4 24 20 4
5 22 20 2
6 20 20 0
7 18 20 -2
 Consumer’s Surplus
Price & Marginal Utility

Price

Marginal
Utility

O Q Units of
Commodity X
 The marginal utility of each good is given in Table
7.1.
Amy is maximizing her utility.
The MU of the goods is given, the price of
X=Rs.2 and Y=Rs.3.
Using the principle of equimarginal utility find
out how much units of X and Y he consumes?
How much do you think is his lowest budget?
Units MUx (utils)x MUy (utils)y

1 20 24

2 18 21

3 16 18

4 14 15

5 12 12

6 10 9
 Asha, Lata, Jeevan and Ashok go for a trek and
stop in a motel.
The willingness to pay of each trekker is given
below which reflects their marginal utility.
The price of the motel room is Rs.3000.
What would be the consumer surplus for each of
them?
What would be the dilemma for the group?
Suppose price of motel room is reduced to Rs
2500 How would the decision change?
Name WTP(MU in
Rs)
Asha 7000
Lata 6000
Jeevan 4000
Ashok 2500
Combination Commodity X Commodity Y
(in units) (in units)
A 1 12
Combination Commodity X Commodity Y
(in units) (in units)
A 1 12
B 2 8
Combination Commodity X Commodity Y
(in units) (in units)
A 1 12
B 2 8
C 3 5
Combination Commodity X Commodity Y
(in units) (in units)
A 1 12
B 2 8
C 3 5
D 4 3
Combination Commodity X Commodity Y
(in units) (in units)
A 1 12
B 2 8
C 3 5
D 4 3
E 5 2
Combination Commodity X Commodity Y
(in units) (in units)
A 1 12
B 2 8
C 3 5
D 4 3
E 5 2
An indifference schedule is the list of various
alternative combinations of two goods, which yield
equal level of satisfaction to the consumer.
14

A
12

10
Commodity Y

B
8

6
C

4
D
E
2

0
0 1 2 3 4 5
Commodity X 6
Commodity Y

IC3

IC2

IC1

O
Commodity X
Combinati Commodit Commodit MRS
on yX yY
(in units) (in units)
A 1 12 -
B 2 8 4
C 3 5 3
D 4 3 2
E 5 2 1
14

A
12

10
Commodity Y

B
8
F

6
C
G
4
D
H E
2
I

0
0 1 2 3 4 5
Commodity X 6
 The price line is the locus of points representing all
the different combinations of the two goods that can
be purchased by the consumer, given his money
income and the prices of the two goods.
 Income = Rs.50
Price of commodity X = Rs.5
Price of commodity Y = Rs.10
Combination Commodity X Commodity Y
(in units) (in units)
A 10 0
B 8 1
C 6 2
D 4 3
E 2 4
F 0 5
 Price line
5
Commodity Y

O
2 4 6 8 10 Commodity X
 MU X PX
MRS XY = =
MU Y PY

A
C
Commodity Y

Y E

IC3 (300 utils )

IC2 (200 utils )

D
IC1 (100 utils )

O X B
Commodity X