Utility Analysis

Dr. K. Anbumani
Associate Professor
 Utility Analysis
Level of consumer satisfaction is measured in unit of ‘util’

People demand a commodity because they derive or expect to derive

some utility from it.

Product angle: Utility is the want satisfying property of a commodity.

It is absolute and ingrained in a commodity irrespective of a

consumer wants it or not. For example, a pen has its utility of writing
irrespective of the fact whether the consumer is literate or illiterate.

It is ethically neutral because it may satisfy even a need which is

socially immoral, for example, alcohol, drugs, etc.
 Utility Analysis

Consumers angle: Utility is the psychological feeling of

satisfaction, pleasure or well being which a consumer
derives from the possession or use or consumption of a
commodity.
According to this angle, it is a post-consumption
phenomena which a consumer gets only when it is used
or after using it.

It is subjective and relative concept. Because it may not

useful for everyone. A teetotaler has no utility in a whisky
bottle. It varies from person to person; time to time; same
person may get different utility at different times.
 Total Utility

Assuming that the utility is measurable and additive,

the total utility is the sum of the total utility derived by a
consumer from the various units of a commodity over a
period of time.

If he consumes one commodity X, and gets utility

Ux = u1 + u2+ u3+…+ un

If he consumes more than one commodity X, Y, Z then

his TU would be, TUn = Ux + Uy+ Uz
Marginal Utility
 Law of Diminishing Marginal Utility
If other things are equal, as the quantity consumed of a
commodity increases more and more the utility derived
from each successive units of that commodity will be
diminishing
 Why does MU Diminish?

Because the consumer’s intensity of need for

that commodity diminishes from each
successive unit of consumption.

Assumptions
1. Unit of commodity is standard.
2. Consumer’s taste and preference remains the
same
3. Units are consumed continuously at a time
4. Mental condition is stable.
 Cardinal Utility
Utility is a psychological phenomena. It is a feeling of satisfaction,
happiness, etc.

Classical economists Bentham, Walrus, Carl Menger and neo-

classical economists, notably Alfred Marshall believed it can be
cardinally or quantitatively measured as length, height, weight, etc.
They said utility can be measured in numbers like 1,2,3 ,4 …

Neo-classical economists coined the term Alfred

Util meaning ‘units of money’– One util Marshall
is equal to ‘one unit of money’ – utility of (1842-1924)
money remains constant Principles of
Economics
Demand, MU
 Cardinal Utility

Assumptions
1. Rational: Buy first which gives maximum utility
2. Limited income: makes choice making inevitable
3. Maximum satisfaction: from spending his/her
income
4. Utility is cardinally measurable
5. Diminishing marginal utility
6. Constant marginal utility of money
7. Utility is additive
 Ordinal Utility
Modern economists JR Hicks, and RGD Allen believed that
utility can only be ordinally measured not in quantitative
terms.
Sir. John Richard Hicks
(1904-1989) British Economist
Nobel Prize in Economics (1972)
Sir. Roy George Douglas Allen
(1906-1983) British Economist
Known for: Elasticity of
They hold that utility can be expressed in terms
substitution of ‘less than’
or ‘more than’. Therefore it is possible only to make some
order for their preference or desirability, but not with exact
number values.
 Ordinal Utility

Assumptions
1. Rational: Buy first which gives maximum utility
2. Utility can be expressed only ordinally
3. Consumer’s choice is transitive: If he prefers A to
B, B to C then A to C…..or….A=B, B= C, then A = C
4. Consumer’s choice is consistent: If he prefers A to
B in one time, he would not prefer B to A some
other time, nor B = A.
5. Saturation is not achieved: Consumer never gets
supply full for any required good or service.
6. MRTS is diminishing: The rate at which a
consumer is willing to substitute one commodity
(X) for another (Y).
THANK YOU