University School of Business

Bachelor of Business Administration

Micro Economics (22BAT-111)
Dr. Gurpreet Kaur

UTILITY ANALYSIS DISCOVER . LEARN . EMPOWER

Course Objective:
The course aims to familiarize the students the
concepts of economics as it is applicable in the real
world situation.

Course Outcome
CO Title Level
Number

CO1 To review the dynamics of economy Remember

and its application in modern day  
business.

Source:
https://www.toppr.com/guides/business-economics-cs/theory-of
-consumer-behavior/meaning-and-concept-of-utility/

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 CARDINAL UTILITY
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.

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 CARDINAL UTILITY ANALYSIS
a) Assumptions of Cardinal Utility analysis

b) Law of Diminishing Marginal Utility

c) Law of Equal-Marginal Utility

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 ASSUMPTION OF CARDINAL UTILITY
ANALYSIS
1. Rationality of consumer
2. Cardinal measurability of utility
3. Marginal Utility of Money is constant
4. Diminishing Marginal Utility
5. Utility is Additive – TU= Ux+ Uy+ Uz+…….+ Un
6. The hypothesis of Independent Utility
7. Introspective method

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 LAW OF DIMINISHING MARGINAL
UTILITY
• Gossen first law

• According to Alfred Marshall ‘the additional utility which a person derive from
the consumption a commodity diminishes, that is Total Utility increase at an
diminishing rate ‘

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 LAW OF DIMINISHING MARGINAL
UTILITY
1. It is a psychological fact that when a person acquires more and more units of
the same commodity during a particular time, the utility he derives from the
successive units will diminish. In other words, the additional satisfaction
derived from the additional units of a commodity goes on decreasing.

2. H.H Gossen was the first economist to explain the law of diminishing marginal
utility, and the law of equi marginal utility in 1854. W.S Jevons named them as
Gossen first and second laws of consumption (1871). In 1890 Marshall in his
“Principle of Economics” developed this analysis in a refined manner

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 DEFINITION OF THE LAW
• Alfred Marshall defines the ‘Law of Diminishing Marginal Utility’ as “The
additional benefit which a person derives from a given increase of his stock of a
thing diminishes with every increase in the stock that he already has.”

• In the words of K.E Boulding “As a consumer increases the consumption of any
one commodity, keeping constant the consumption of all other commodities the
marginal utility of the variable commodity must eventually decline”

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 LAW OF DIMINISHING MARGINAL
UTILITY
Unit of Total Utility Marginal
Mango Utility
• ‘the additional utility which a person
derive from the consumption a 1 10 10
commodity diminishes, that is Total 2 20 10
Utility increase at an diminishing rate ‘ 3 29 9
4 37 8
5 43 6
6 48 5
MUn = TUn – TUn-1 7 51 3
8 52 1
MU =∆TU/∆Q
9 52 0
10 50 -2

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 LAW OF DIMINISHING MARGINAL
UTILITY
• ‘the additional utility which a person derive from the consumption a commodity
diminishes, that is Total Utility increase at an diminishing rate ‘ Saturation Point MU
Unit of Total Utility Marginal
Mango Utility =0 or TU is maximum
TU
1 10 10
2 20 10 TU
3 29 9
4 37 8
No of mango
5 43 6
6 48 5
7 51 3
8 52 1 MU

9 52 0
No of mango
MU
10 50 -2

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 THE RELATIONSHIP BETWEEN TOTAL
UTILITY AND MARGINAL UTILITY
1. When total utility increases at diminishes rate, marginal utility diminishes.

2. When total utility is maximum, marginal utility becomes zero.

3. When total utility decreases, marginal utility becomes negative.

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Exception of the Law:

• Law does not apply under the following situations:

1. Curious and rare things Law does not apply to rare or curious things like persons who collect
old and rare coins, postage stamps as increasing marginal utility as the stock of these rare
articles goes on increasing.
2. Misers: It seems law does not apply to misers who are out to acquire more and more of wealth.
Their desire for money seems to be insatiable.
3. 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.
4. 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.
5. Initial units: When the initial units of a commodity in used in less then appropriate quantity,
then the marginal utility from the additional units goes on increasing.
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, as a consumer goes on purchasing more and more units
of a commodity its marginal utility goes on diminishing. As
such consumer will buy more units of commodity only when
its price goes down. When marginal utility is expressed in
terms of money, in that case, positive part of marginal utility
curve will be the demand curve.
 APPLICATION OF LAW OF
DIMINISHING MARGINAL UTILITY
1. Bases of law of demand- why demand curve slops downward

2. Law of equi- marginal utility is derived

3. Consumer surplus derived

4. Progressive Tax can be justified

5. Water-diamond paradox resolve

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 REFERENCES
• Dwivedi D.N. , Managerial Economic, Vikas Publications, New Delhi.
• Mithani D.M. , Managerial Economics Theory and Applications, Himalaya Publication, Mumbai.
• https://economictimes.indiatimes.com/definition/law-of-demand
• http://www.economicsdiscussion.net/law-of-demand/the-law-of-demand-with-diagram/21903

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 THANK YOU

For queries
Email ID: gurpreet.usb@cumail.in