Utility Analysis

Utility explains the law of Demand.

The utility of good or service is its want satisfying power.

Utility Can be distinguished as :

• Total Utility: total satisfaction obtained from all units of a particular commodity consumed over a period
of time.
• Marginal Utility: change in the total utility that results from unit one unit change in consumption of the
commodity within a given period of time.
MU = ∆TU / ∆Q
Utility can be measured in two ways
Cardinal Approach: measuring the amount of utility in numbers
Ordinal Approach: utility cannot be quantified but we can rank goods in order of preference.
Cardinal Utility analysis is oldest theory of demand which derives Law of Demand. Marshall gave it final
shape.
It involves that a person can compare in respect of size , how much one level of utility is greater than
another
Cardinal Utility Analysis
Cardinal utility analysis has two laws:
• Law of Diminishing Marginal Utility
• Law of Equi Marginal Utility
Law of Diminishing Marginal Utility

“As a consumer consumes more and more units of a specific

commodity, the utility from the successive units goes on diminishing”.

Assumption of the Law

• Homogeneity of The Product

• Continuity
• Constant Marginal Utility
Schedule of Law of Diminishing Marginal Utility:

Units Total Utility Marginal Utility

1st glass 20 20

2nd glass 32 12

3rd glass 40 8

4th glass 40 0

5th glass 37 -3
Law of Equi- marginal Utility
The household maximizing the utility will so allocate the expenditure
between commodities that the utility of the last penny spent on each
item is equal. It is named as the Law of Substitution, the Law of
Maximum Satisfaction, the Law of Indifference. This solves the problem
of allocation of scarce resources.
The consumer will maximize total utility from his income when the
utility from the last rupee spent on each good is the same.  
Algebraically, this is:
  MUa / Pa = MUb / Pb
Schedule of Law of Equi- Marginal Utility:

Units of Money Spent MU of Apple MU of Orange

1 25 (1) 22(3)
2 23(2) 20(5)
3 21(4) 18(7)
4 19(6) 16(9)
5 17(8) 14
6 16(10) 12
7 14 9
8 13 6
9 10 3
10 7 1
Total Utility 165 (121) 102 (76)
Consumer Surplus
Consumer surplus may be defined as the excess of the price which a
consumer are willing to pay, rather than go without the thing, that he
actually does pay.
No. of Units Marginal Utility Price Consumer Surplus
1 30 20 10
2 28 20 8
3 26 20 6
4 24 20 4
5 22 20 2
6 20 20 0
7 18 20 -2