BUSINESS ECONOMICS

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Utility

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 What is Utility?

• Satisfaction
• Can not be measured
– Marshall – Utility can be measured in Utils

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 The Utility
• Utility is the WANT-SATISFYING PROPERTY of a COMMODITY
from a COMMODITY ANGLE.

• UTILITY is the PSYCHOLOGICAL FEELING of SATISFACTION,

PLEASURE, HAPPINESS or WELL-BEING Which a consumer
derives from the CONSUMPTION, POSSESSION or the use of a
COMMODITY from a CONSUMER ANGLE.
OR
UTILITY is a POST-CONSUMPTION phenomenon as one derives
satisfaction from a commodity only when one CONSUMES or
USES it.

• UTILITY IN THE SENSE OF SATISFACTION IS A ‘SUBJECTIVE’

OR ‘RELATIVE’.
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What are kinds of Utility?

• Form Utility
• Place Utility
• Time Utility

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 Form Utility

• In what form is a product available

– Whole chicken
– Chicken parts
– Cooked chicken
• Each step adds value

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 Place Utility

• The place where is a product available

• Convenience
– Home Delivery
– Anywhere Delivery

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 Time Utility

• When is a product available

– Urgent
– Red Carpet Route

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 TOTAL UTILITY
• TOTAL UTILITY may be defined as the sum of the
• Utilities derived by a CONSUMER from the various units of
GOODS & SERVICES he CONSUMES.
TU = U1+U2+U3+…………….+Un

MARGINAL UTILITY
• MARGINAL UTILITY refers to the CHANGE in the TOTAL
UTILITY obtained from the CONSUMPTION of an ADDITIONAL
UNIT of a COMMODITY.

MARGINAL UTILITY = CHANGE IN TOTAL UTILITY / CHANGE

IN ONE UNIT
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TOTAL & MARGINAL UTILITY SCHEDULE
(The Law of Diminishing Marginal Utility)

No. of Units Total utility Marginal utility

consumed
1 30 30
2 50 20
3 60 10
4 65 5
5 60 -5
6 45 -15
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 CONSUMER’S EQUILIBRIUM
• A consumer shall be in equilibrium where he can maximize
his utility, subject to his Budget constraint. Thus the
quantity of a commodity that a consumer purchases is
constrained by both the Law of Diminishing Marginal Utility
and the purchasing power with the consumer. In
equilibrium, the consumer balances the utility of goods
against its cost.
That is, MUx = Px

So long as MUx > Px he should buy that unit.

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 LAW OF EQUI-MARGINAL UTILITY
• In real life, consumers purchase many goods with the help of their
incomes. He has to decide how he should spend his limited income on
different goods so as to get maximum possible satisfaction. The
problem of allocation of income between goods can be solved with the
help of the Law of Equi-marginal Utility which states that :

A consumer maximizes his total utility by allocating his income

among goods and services (including savings) available to him in
such a way that the marginal utility per rupee’s worth of one good
equals the marginal utility per rupee’s worth of any other good. In
other words, marginal utility per rupee spent on each good should be
equal if a consumer wishes to maximize his total utility.

MUx MUy MUn

------- = -------- = ………………….. = --------
Px Py Pn
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 Law of Equi-Marginal Utility

• Let a consumer wants to have a choice

between two goods X and Y, priced at Px
and Py.

• He has a limited income, say Rs. 12 which

the consumer spends only at a rate of Re.
1 at a time.

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 MARGINAL UTILITY SCHEDULE
Good X (Px=Re.1) Good Y (Py= Re.1)
Units of X MUx Units of Y MUy

1 80 1 60

2 72 2 58

3 64 3 56

4 56 4 54

5 48 5 52

6 40 6 50

7 24 7 48

8 8 8 40

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 Clarification of Law of Equi-Marginal Utility

By allocating the money between X and Y, the consumer has

bought 5 units of X and 7 units of Y. It is noted that marginal utility
per rupee spent on X equals the marginal utility per rupee spent on
Y – both 48 units, and the total utility is maximized because it was
placed rupee by rupee where each rupee made its greatest
contribution to total utility.

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 ASSUMPTIONS

• The unit of goods to be consumed must be a standard

one.

• The consumer’s taste or preference must remain the

same during the period of consumption.

• There must be continuity in consumption.

• The mental condition of the consumer must remain

normal during the period of consumption.

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 ASSUMPTIONS

• The unit of goods to be consumed must be a

standard one.

• The consumer’s taste or preference must remain the

same during the period of consumption.

• There must be continuity in consumption.

• The mental condition of the consumer must remain

normal during the period of consumption.

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 Utility Theory

• Assumptions About Consumer Preferences

– More is better.
– Consumers can rank preferences.
– Consumers ran-order desirability of products.
• Utility Functions
– Descriptive statement relates well-being and
consumption.
• Marginal Utility
– Added benefit is focus of consumers.
• Law of Diminishing Marginal Utility
– Marginal utility eventually declines for everything.
Thank You !!

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