Utility

CHAPTER CHECKLIST

Abu Naser Mohammad Saif

Assistant Professor
Faculty of Business Studies
University of Dhaka
 Utility
Utility is the benefit or satisfaction that a
person gets from the consumption of a
good or service.
An economic term referring to the total
satisfaction received from consuming a
good or service
 Total Utility

Total utility is the total benefit that a person

gets from the consumption of a good or
service.
Total utility generally increases as the
quantity consumed of a good increases.
The following table shows an example of
total utility from bottled water and chewing
gum.
 Marginal Utility
Marginal utility is the change in total utility that
results from a one-unit increase in the
quantity of a good consumed. The additional
satisfaction a consumer gains from
consuming one more unit of a good or
service. Marginal utility is an important
economic concept because economists use it
to determine how much of an item a
consumer will buy.
To calculate marginal utility, we use the total
utility numbers in previous table.
Marginal Utility

The marginal utility of

the third bottle of
water is 36 units
minus 27 units, which
equals 9 units.
 Diminishing Marginal Utility
A law of economics stating that as a
person increases consumption of a
product while keeping consumption of
other products constant, there is a decline
in the marginal utility that person derives
from consuming each additional unit of
that product.
Measuring Marginal Utility
Figure shows total utility and
marginal utility.
Part (a) graphs Tina’s total utility
from bottled water.
Each bar shows the extra total
utility she gains from each
additional bottle of water—her
marginal utility.
The blue line is Tina’s total utility
curve.
Part (b) shows how Tina’s
marginal utility from bottled
water diminishes by placing
the bars shown in part (a)
side by side as a series of
declining steps.

The downward sloping

blue line is Tina’s
marginal utility curve.
Maximizing Total Utility
The goal of a consumer is to allocate the
available budget in a way that maximizes
total utility.
The best budget allocation occurs when a
person follows the utility-maximizing rule:
1. Allocate the entire available budget.
2. Make the marginal utility per dollar equal
for all goods.
Indifference Curve
An indifference curve is a graph showing
different bundles of goods between
which a consumer is indifferent. At each
point on the curve, the consumer has no
preference for one bundle over another.
One can equivalently refer to each point
on the indifference curve as rendering
the same level of utility (satisfaction) for
the consumer. The theory of indifference
curve was coined by Francis Edgeworth.
 Indifference Curve

The above diagram shows the U indifference curve showing bundles of

goods A and B. To the consumer, bundle A and B are the same as both
of them give him the equal satisfaction. In other words, point A gives as
much utility as point B to the individual. The consumer will be satisfied
at any point along the curve assuming that other things are constant.
 Assumptions of Indifference Curve
1. Two commodities:
It is assumed that the consumer has a fixed
amount of money, whole of which is to be spent
on the two goods, given constant prices of both
the goods.
2. Non Satiety:
It is assumed that the consumer has not reached
the point of saturation. Consumer always prefer
more of both commodities, i.e. he always tries to
move to a higher indifference curve to get higher
and higher satisfaction.
Assumptions of Indifference Curve
3. Ordinal Utility:
Consumer can rank his preferences on the basis of
the satisfaction from each bundle of goods.
4. Diminishing marginal rate of substitution:
Indifference curve analysis assumes diminishing
marginal rate of substitution. Due to this assumption,
an indifference curve is convex to the origin.
5. Rational Consumer:
The consumer is assumed to behave in a rational
manner, i.e. he aims to maximize his total
satisfaction.