Chapter 3

In this we will discuss about:

:- Concept of UTILITY
:- Measurement of Utility
:- Law of Diminishing Marginal Utility
:- Meaning of Consumer Equilibrium
:- Determination of Consumer equilibrium
In case of :
a) Single Commodity
b) Several commodity
 Concept of UTILITY

Want satisfying power of a good is known

as utility.
OR
Utility may be defined as ‘satisfaction
derived from the consumption of a good.’
 Measurement of Utility

There were two great economists, who have

different opinions for measuring utility.

Alfred Marshall : He believes that we can

measure utility or satisfaction in terms of
cardinal numbers like 1,2,3,4 etc. The standard
unit to measure utility is Utils.

J.R.Hicks: He believes that satisfaction can only

be ranked as ‘high’ or ‘low’. It cannot be
expressed in terms of units or utils.
In this chapter we will discuss and understand
the concept cardinal measurement. It is also
called utility analysis.
 Concept of Total Utility and Marginal Utility

Total utility :- It is the sum total of utility

derived from the consumption of all the units
of a particular good.

TU = ∑MU

Marginal utility :- It refers to the additional

utility on account of the consumption of an
additional unit of a commodity or good.

MU= TUn –TUn-1

Illustration on the estimation of TU and MU

UNITS TU MU
1 5 5
2 9 4
3 12 3
4 14 2
5 15 1
6 15 0
7 14 -1
 Relationship between
Total utility and Marginal utility

1) TU increases MU decreases
2) TU maximum MU is zero
3) TU decreases MU negative
 Law of Diminishing Marginal Utility

The law states that as more and more units of a

good are consumed by the consumer, marginal
utility derived from every additional unit must
decline.

Assumptions:
1) Only standard units of a good are consumed.
2) Consumption of a good is continuous.
 Concept of Consumer Equilibrium

Meaning: The consumer is in equilibrium when ,

given his income and market prices, he plans
his expenditure in such a manner that he
maximizes his total satisfaction.

Assumptions related to consumer equilibrium

1) Rational consumer
2) Cardinal utility
3) MUm is constant.
(MUm means marginal utility of money)
MUm = a worth of a rupee for a consumer
Determination of consumer equilibrium through
Single commodity approach

This approach helps us to determine consumer

equilibrium when a consumer consumes single
commodity.

Purchase of a good buy a consumer depends on

three factors:
1) Price of a good
2) MU of a good
3) MU of money (MUm)
So, condition is
MUx
= MUm
Px
Determination of consumer equilibrium through
Several commodity approach

This approach helps us to determine consumer

equilibrium when a consumer consumes several
commodities (two commodities).

In this, the condition is

MUx MUy
= = MUm
Px Py
If situation (i) is:
MUx MUy
>
Px Py

Is the consumer is in equilibrium?

What will be his reaction….?

If situation (ii) is:

MUx MUy
<
Px Py

Is the consumer is in equilibrium?

What will be his reaction….?
Answer of situation (i)
No, the consumer is not in the equilibrium.
The reaction of a consumer is, he will starts
consuming more of good X because he gets
more satisfaction while paying less of money in
compare to good Y.
As he starts consuming more of good X, law of
diminishing marginal utility applies and MUx
starts declining and MUy starts rising. This
process will continue till

MUx MUy
= = MUm
Px Py
Answer of situation (ii)
No, the consumer is not in the equilibrium.
The reaction of a consumer is, he will starts
consuming more of good Y because he gets
more satisfaction while paying less of money in
compare to good X.
As he starts consuming more of good Y, law of
diminishing marginal utility applies and MUy
starts declining and MUx starts rising. This
process will continue till

MUx MUy
= = MUm
Px Py