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UTILITY ANALYSIS

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DEMAND CURVE

Robinson.Meaning of Utility: The term utility in economics is used to denote that quality in a commodity or service by virtue of which our wants are satisfied. · In the words of Hibdon. “Utility is the quality in commodities that makes individuals wants to buy them .” · According to Mrs. Definitions: · According to Jevons. “Utility is the quality of good to satisfy a want. In other words. want – satisfying power of a good is called utility. “Utility refers to abstract quality whereby an object serves our purpose.

g. Use of opium liquor may not be proper from moral point of view. E. Liquor and cigarette are not useful. A thing may have different utility to different persons. drunkards. It varies with time and place. E. Utility is not essentially Useful: A commodity having utility need not be useful.g. Utility is independent of Morality: It has nothing to do with morality. but if these things satisfy the want of addict then they have utility for him. they have utility . 2. 4. 3. Utility is Subjective: as it deals with the mental satisfaction of a man. it has no utility. but as these intoxicants satisfy wants of the opium – eaters. Cooler has utility in summer not during winter season.g. Utility is Relative: As a utility of a commodity never remains the same. Liquor has utility for drunkard but for person who is teetotaller.1. E.

“Util”.Can utility be measured? It can be attempted to measure by two methods: 1. 2. Measurement in terms of Money: In order to measure the utility in terms of money. Fisher has used the term. it is estimated what amount of money a man is willing to pay for a thing. Therefore utility cannot be measured definitely in the terms of money. In this method utility is expressed in Utils. Criticism of the Measurement of Utility: It has been criticized by Prof. Marginal Utility: The change that takes place in the total utility by the consumption of an additional unit of commodity is called marginal utility . Samuelson as the value of money keeps changing. Measurement in terms of Units: Prof. as a unit for the measurement of utility.

Law of Equi – Marginal Utility .Law of Diminishing Marginal Utility 2.Laws of Utility Analysis: Utility has two main laws: 1.

then as the number with you is increasing.LAW OF DIMINISHING MARGINAL UTILITY Law of Diminishing Marginal Utility is the foundation stone of utility analysis. It is the reality of man’s life which is referred to in economics as Law of Diminishing Marginal Utility. If you buy pen at any given time. . All of us experience this law in our daily life. the marginal utility from each successive pen will go on decreasing.

· Thus fifth cup will yield zero MU. At this stage want may be fully satisfied. -1 util. If you are forced to take sixth cup of ice cream it may upset system and yields negative utility say. · Third cup will yield still less MU. say 2utils.e. · Fourth cup will yield just 1utils of MU. . 3utils. · The second cup of ice cream will yield less marginal utility than the first one i.NO. OF ICE CREAM CUPS MARGINAL UTILTY FIRST 4 SECOND 3 THIRD 2 FOURTH 1 FIFTH 0 SIXTH -1 Table Shows: · The table shows that first cup of ice cream yields 4utils of marginal utility.

third 2 utils and fourth 1util of marginal utility. · AB curve touches OX – axis at point C that represents fifth cup of ice cream. second 3 utils. . · sixth cup of ice cream yields negative marginal utility and so AB curve goes below OX – axis. Fifth cup of ice – cream yields zero marginal utility.4 +Ve 3 Point of Saturation 2 1 Zero MU C O X 1 -1 2 3 4 5 6 B In the Figure: · OX axis – Ice Cream(Quantity) · OY axis – Marginal Utility(MU) · AB is Marginal Utility Curve (MUC) · It slopes downward from left to right (negative slope) indicating first cup of ice cream 4 utils.

Curious and rare things Law does not apply to rare or curious things like persons who collect old and rare coins. Drunkards It can be said that when a drunkard takes a liquor and intoxicant than as he takes more and more pegs of liquor his desire to have more of it goes on increasing. 3.Exceptions: Law does not apply under the following situations: 1. Their desire for money seems to be insatiable. They are always keen to obtain more and more units of such things. Misers It seems law does not apply to misers who are out to acquire more and more of wealth. 5. 2. Good book or poem It is said that by reading a good book or listening to a melodious song and a beautiful poem again and again one gets more utility than before. Initial units When the initial units of a commodity in used . 4. postage stamps as increasing marginal utility as the stock of these rare articles goes on increasing.

price is shown on OX – axis then the curve obtained will be called demand curve as is indicated in figure above. in that case.Derivation of demand curve with the help of law of diminishing marginal utility: The price that consumer pays for a commodity is equal to its Marginal utility. . According to law of diminishing marginal utility. When marginal M1 Demand Curve utilityP1is expressed in terms of money. Figure A represents marginal utility curve. positive part of marginal utility curve will be Price P2 M2 the demand curve M3 O P3 Q1 Q2 Q3 Quantity U X O Q1 Q2 Q3 Quantity X When marginal utility is shown on OY – axis then the curve obtained will be marginal utility curve. In case. as a consumer goes on purchasing more and more units of a commodity its marginal utility goes on diminishing. As such consumer will buy M units Diminishing MU D when more of commodity only its price goes down.

It states that in order to get maximum satisfaction.LAW OF EQUI – MARGINAL UTILITY Law of equi – marginal utility is the second important law of utility analysis. In simple words it is called as law of maximum satisfaction . Left witch refer to it as the general principal for maximization of consumer satisfaction. This law concerning the expenditure of the consumer was propounded in 19th century by a French engineer Gossen. Dr Marshall has called it law of Equi Marginal Utility. consumer should spend his limited income on different commodities in such a way that the last rupee spent on each commodity yield him equal marginal utility. This law point out of how a consumer can get maximum satisfaction out of his given expenditure on different goods.

Explanation: The law can be explained with the help of table and figure below: MU OF MANGOES MU OF MILK 1 12 10 2 10 8 3 8 6 4 6 4 5 4 2 [A] 12 MU OF MANGOES 10 10 8 Utility 6 4 4` 1 2 3 4 5 X Equi – Marginal Utility Line 8 6 O [B] MU of Milk 12 O 1 2 3 4 5 X .

5. 2 on milk because third rupee spent on mangoes and second rupee spend on milk yield equal marginal utility i. MU of Milkby the consumer out of his · It will be the MUmaximum of Mangoestotal 12 utility derived expenditure 10 10 E of Rs. · By distributing his income on mangoes and milk in this manner the consumer gets total utility of 48 utils. he will spend Rs.e.In the figure above: · OY axis – Marginal Utility. · Line adjoins the figure represents equal marginal utility derived from the last rupee spent on both the goods. 8 A 8 F · It is by spending his income the consumer in this manner that the 6 6 consumer will get B maximum satisfaction. 3 on mangoes and Rs.5. 4 4 Gain Loss D O 1 2 3 Rupees H C 4 5 X O G 1 2 3 4 Rupees 5 X . OX – Units of Rupees · The figure indicates that if the income of the consumer is Rs. 8utils.

as in figure above. then his total utility will be less than the maximum. . the consumer loses 8utils of marginal utility as shown by EFGH area. · OX axis – Rupees OY axis – M. · Similarly by spending one rupee less on milk.· If the consumer spends his income on mangoes a milk in any other manner. Utility · It is evident from the figure that by spending one rupee on mangoes the consumer gains 6utils of marginal utility as shown by ABCD area.

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