2.

UTILITY AND DEMAND ANALYSIS

Dr. Rajesh Raut

How many of u like Avengers?
Rate ur satisfaction after watching avengers. Scale 1-15

No of time YOU Marginal

u watched Utility
1
2
3
4
5
6
Rate ur satisfaction after watching avengers. 1 time, 2 ……..

No of time YOU Marginal

u watched Utility

1 10 10
2 12 2
3 12 0
4 10 -2
5 7 -3
6 2 -5
UTILITY
 Utility is synonymous with “Pleasure”, “Satisfaction” & a
Sense of Fulfillment of Desire.
 Utility → “WANT SATISFYING POWER” of a
Commodity.
 Utility is a Psychological Phenomenon.
 Definition:
 Utility is the Qualityin Commodities
that makes Individuals want to buy them. ------
Mrs. Robinson
 UTILITY IS SUBJECTIVE
Different individuals can get different levels
of utility from the same commodity.
One who likes chocolates will get much higher utility from a
chocolate than some one who is not so fond of chocolates, Also,
utility that one individual gets from the commodity can change
with change in place and time.

For example, utility from the use of a room heater will depend
upon whether the individual is in Ladakh or Chennai (place) or
whether it is summer or winter (time).
MEASURES OF UTILITY

Total Utility:
Total utility of a fixed quantity of a commodity (TU) is the
total satisfaction derived from consuming the given amount
of some commodity x.
X Means- Mango, Avenger, Surfing on net
More of commodity x provides more satisfaction to the
consumer. TU depends on the quantity of the commodity
consumed. Therefore, TUn refers to total utility derived
from consuming n units of a commodity x.
Utility from consumption of BANANA
 MARGINAL UTILITY:
Marginal utility (MU) is the change in total utility due to
consumption of one additional unit of a commodity.
For example, suppose 3 bananas give us 22 units of total utility
and 4 bananas give us 24 units of total utility. Clearly, consumption
of the 4th banana has caused total utility to increase by 2 units
(24 units minus 22 units). Therefore, marginal utility of the 4th
banana is 2 units.
MU4 = TU4 – TU3 = 24 – 22 = 2
In general, MUn = TUn – TUn-1,
where subscript n refers to the nth unit of the commodity
Total utility and marginal utility can also be related in the following way.
Utility from consumption of BANANA
LAW OF DIMINISHING MARGINAL UTILITY
READ
Law of Diminishing Marginal Utility states that
marginal utility from consuming each additional
unit of a commodity declines as its consumption
increases, while keeping consumption of other
commodities constant.
GRAPH
Y=3X +2
Y= a X + b
a= slope
b= intercept
X=0----Y= 3 X 0 +2 =2
X=1-----Y=3 X 1 +2 =5
X=2-----Y=3 X 2+2 =8
(X, Y)
(0,3 ), (1,5) (2, 8)
GRAPH
Y=5X -3

X=0----Y= 5 X 0 -3 =-3
X=1-----Y=5 X 1- 3 =2
X=2-----Y=5 X 2 -3=7
GRAPH
Y=-3X +8

X=0----Y= -3 X 0 +8 =8
X=1-----Y=-3 X 1 +8 =5
X=2-----Y=-3 X 2+8 =2
UTILITY MEASUREMENT

CARDINAL

ORDINAL
CARDINAL UTILITY ANALYSIS- READ

Cardinal utility analysis assumes that level of utility

can be expressed in numbers.
For example, we can measure the utility derived
from a shirt and say, this shirt gives me 50 units of
utility.
ORDINAL UTILITY ANALYSIS
Cardinal utility analysis is simple to understand, but suffers
from a major drawback in the form of quantification of
utility in numbers.
In real life, we never express utility in the form of numbers.
At the most, we can rank various alternative combinations
in terms of having more or less utility. In other words, the
consumer does not measure utility in numbers, though
she often ranks various consumption bundles.
In real life we compare not measure
examples-
I am more satisfied by watching avenger than
Badrinath Ki Dulhania or vice versa
I like pineapple juice than apple juice
I like tea than COFFEE
In real life we compare not measure,
5 utility in avenger ---NO
we rank or compare
1 Avenger, 2 Badrinath Ki Dulhania
1TEA, 2 COFFEE, 3 Juice
EQUAL SATISFACTION Tea= coffee
A consumer’s preferences over the set of available bundles can often be
represented diagrammatically. We have already seen that the bundles
available to the consumer can be plotted as points in a two dimensional
diagram.
INDIFFERENCE CURVE

All the points such as A, B, C and D lying on an

indifference curve provide the consumer with the
same level of satisfaction.
It is clear that when a consumer gets one more
banana, he has to forego some mangoes, so
that her total utility level remains the same and
she remains on the same indifference curve.
INDIFFERENCE CURVE
Definition:
An indifference curve is a graph showing
combination of two goods that give the
consumer equal satisfaction and utility.
Each point on an indifference curve indicates that a
consumer is indifferent between the two and all
points give him the same utility.
 INDIFFERENCE CURVE

Assumptions to Indifference Curve Analysis:

• Rationality of Consumer: The Consumer is Rational & aims

at maximizing his Total Satisfaction.
• Ordinal Utility: Utility can be expressed Ordinally i.e.
Consumer is able to tell only Order of his Preferences.
• Transitivity of Choice: Means that if a Consumer prefers
A to B & B to C, he must prefer A to C.
• Consistency of Choice: Means that if a Consumer prefers
A to B in one period, he will not prefer B to A in another
period or Treat them as Equal.
26
 WHY ASSUMPTIONS ARE REQUIRED IN
ECONOMICS???
As human behavior changes with time and availability
of resources.
It is difficult to study that is why assumptions.

Assumptions- आधारविना खरी आहे अशी मानलेली गोष्ट

NO LOGIC BUT TRUE
PROPERTIES OF INDIFFERENCECURVE
1. An Indifference Curve has a Negative Slope i.e. it Slopes
Downwards.
2. Two Indifference Curves never Intersect or become Tangent to
Each other.
3. Higher Indifference Curve represents Higher Satisfaction
NEGATIVE SLOPE
PROPERTIES OF INDIFFERENCECURVE
• Two
Indifference
IC2
IC1 Curves never
Good Y

Intersect or
become
•A Tangent to
•B Each other.
•C

Good X
 INDIFFERENCEMAP
IC2 IC3 An Indifference Map represents a
Group of Indifference Curves each of
Mango

IC1
expresses a given level of
Satisfaction.
If an Indifference curve Shifts to Right,
the of Satisfaction goes on Increasing.
From the Point of View of Satisfaction
IC3 >IC2 >IC1

Banana
UTILITY MEASUREMENT
Cardinal Utility:
The numbers 1, 2, 3, 4 are cardinal numbers
For example the number 2 is twice the size of 1
In the same way, the number 4 is four times the size of number 1
Alfred Marshall developed cardinal utility analysis.
According to cardinal approach, utility can be measured.
Ordinal utility:
The numbers 1st, 2nd, 3rd, and 4th, are ordinal numbers
These ordinal numbers are ranked or ordered
This ranking does not explain the actual size relation of the numbers. The
second one might or might not be twice as big as the first one.
Hicks and Allen used ordinal utility approach for analyzing the consumer
behavior. This analysis is known as indifference curve analysis.
 TYPES OF UTILITY
1) Form utility- Utility Created due to change in form- e.g.
wood into chair.

2) Place utility- Place utility refers primarily to making goods

or services physically available or accessible to potential
customers.
E.g. Buying mobile from retail or online

3) Time utility- Utility Created due to time.

Preserving grain and selling at time of low demand.
Shop is open 24 x 7.

4) Service utility-Utility created by rendering services

E.g. doctors, teachers
CONSUMER’S EQUILIBRIUM -BUDGET LINE AND
CONSUMER SURPLUS

Meaning of Price Line or Budget Line:

• The Budget Line shows all those Combinations of Two Goods which
the Consumer can buy Spending his Given Money Income on two
Goods at their given Prices.

• Remember, that the Amount of a Good that a Person can buy will
depend upon their Income and the Price of the Good.
 BUDGET LINE
Suppose the income of the consumer is M (20) and the
prices of bananas and mangoes are p1(5 per unit) and p2
(5 per unit) respectively.
How many combinations u can create in given
budget????

p1x1+p2x2 =20

p= price
x= quantity
 CONSUMER’S EQUILIBRIUM - BUDGET LINE AND CONSUMER SURPLUS

The bundles that this consumer can afford to buy are: (0, 0), (0, 1),
(0, 2), (0, 3), (0, 4), (1, 0), (1, 1), (1, 2), (1, 3), (2, 0), (2, 1), (2, 2),
(3, 0), (3, 1) and (4, 0). Among these bundles,

(0, 4), (1,3), (2, 2), (3, 1) and (4, 0) cost exactly Rs 20 and all the
other bundles cost less than Rs 20.

Draw graph using these points?

The consumer cannot afford to buy bundles like (3, 3) and

(4, 5) because they cost more than Rs 20 at the prevailing prices.
BUDGET LINE
CONSUMER’S EQUILIBRIUM - BUDGET LINE AND CONSUMER SURPLUS

Suppose the income of the consumer is M (20) and the prices of

bananas and mangoes are p1(5 per unit) and p2 (5 per unit)
respectively. Draw budget line,
Banana on x axis and Mango on Y axis 9 (ur choice)
0 banana ---------------20/5 =4 mango (0, 4)
0 mango -------------20/5 = 4 banana (4,0)
BUDGET LINE
 BUDGET LINE

Y Price Line or Budget Line

PRICELINE
• Point outside the given Price Line,
M like H, will be Beyond the Reach of
the Consumer.
•H
Good Y

• Point Below the given Price Line,

•K Like K, shows the Under Spending o

the Consumer.
O X
N
Good X
EXERCISE
John has 100 rs. There r two products in the market.
Pen= RS 25 and Pencil =RS10
Draw budget line .
Plot pen on X axis
And Pencil on Y axis

Suppose john purchased 3 pens and 2 pencils does he underutilizing

the money he has. … comment.
EXERCISE

There r two products in the market.

Pen= RS 25 ------X axis
Pencil =RS10------------Y axis
Consider 0 pen then max Pencils u can purchase =100/10 =10 (0,10)
Consider 0 pencil then max Pen u can purchase =100/25 =4 (4,0)

Points on graph (0 Pen , 10 Pencils) and (4 Pen , 0 Pencils)

(3 x 25) + (10 x 2) =75 + 20 =95 -----underutilizing

EXERCISE ---YOU HAVE 1 LAKH RS

There r two products in the market.

Laptop RS 50000 -X
And mobile RS10000 -Y
Draw budget line .

Suppose you purchased 1 laptop and 5 mobile r u underutilizing the

money u have . … comment.
EXERCISE ---YOU HAVE 1 LAKH RS

There r two products in the market.

Laptop RS 50000 -X
And mobile RS10000 -Y

Points on graph (0 , 10 Mobiles) and (2 Laptop, 0 Mobiles)

(1 x 50000) +(5 x 10000) =100000 no u r on budget line

BUDGET LINE Consumer equilibrium
CONSUMER’S EQUILIBRIUM -

Meaning of Consumer Equilibrium:

• Consumer Equilibrium will be reached when he is deriving

Maximum possible Satisfaction from the Goods & is in no Position
to Rearrange his Purchase of Goods.

• The Indifference Map in Combination with the Budget Line allows us to

Determine the One Combination of Goods and Services that the
Consumer most wants and is able to Purchase. This is the Consumer
Equilibrium.
CONSUMEREQUILIBRIUM-SATISFACTION LINE AND
PRICE LINE
Y • PL– Budget Line
P • Points R, S, Q, T, H
R all lie on Budget
Good Y
Mango

S
Line But Q is
or

Equilibrium Point.
N Q
IC4
T IC3
IC2
IC1
H
X
O M L
Banana or
Good X
CONSUMER EQUILIBRIUM:

• Indifference curve is
tangent to budget line
CONSUMER SURPLUS
• At what price u would buy it ???
• Buying home
 CONSUMER SURPLUS
• At what price u would buy it ???
• Consumer’s Surplus = What a Consumer is Willing to Pay – What he
Actually Pays.

• =10 Cr- 8 Cr =2 Cr is consumer surplus

CONSUMER SURPLUS
• Marshall defined Consumer’s Surplus as “the excess of the Price
which a Consumer would be willing to Pay rather than go without
the thing, over that which he actually does pay.”
• Consumer’s Surplus = What a Consumer is Willing to Pay – What
he Actually Pays.

• Buying movie ticket=300-100 =200

CONSUMER SURPLUS
ASSUMPTIONS TO CONSUMER’S SURPLUS:

 Consumer purchases only one Commodity.

 Price Of the Commodity is Fixed.

CONSUMER SURPLUS
At a local farmers market, puppies of a special breed
are offered for sale at RS 600 a piece. There is a
person, Barbara who is willing to pay 900.
What is Barbara's surplus?
 CONSUMER SURPLUS
At a local farmers market, puppies of a special breed are offered for sale
at RS 600 a piece. There is a person, Barbara who is willing to pay 900,

Barbara's consumer surplus is 300,

X Axis – Quantity and

Y Axis – Price
Mark points for market price and Barbara.
 CONSUMER SURPLUS
Y
M B=900

M=600 R
Price

O X
Q=1
Quantity
 MARKET SURPLUS
At a local farmers market, puppies of a special breed are
offered for sale at RS 600 a piece. There are 3 people at the
market who are willing to pay the market price.
Barbara is willing to pay 900,
Christine is willing to pay 800,
and Dan is willing to pay the market price of 600.

Calculate Barbara's Surplus

Christine Surplus
Dan surplus?
Market Surplus?
MARKET SURPLUS
At a local farmers market, puppies of a special breed are offered for sale at
RS 600 a piece. There are 3 people at the market who are willing to pay the
market price.
Barbara is willing to pay 900,
Christine is willing to pay 800,
and Dan is willing to pay the market price of 600.

Calculate Barbaras Surplus= 300

Christine Surplus=200
Dan surplus? =0
Market Surplus?=500
THANK YOU