UTILITY ANALYSIS

By Mrs. N. Jayaprada Srinivas

INTRODUCTION
Utility is the Power of a Commodity to satisfy human wants. Total Utility is the sum total of the units of utility which an individual derives from the consumption of a commodity during a specified period of time. Average Utility is the aggregate utility of commodities consumed. Total Utility AU= -------------------------------------------

No. Of Units of Commodity consumed

Marginal Utility is the change in the total utility resulting from one unit change in the consumption of a commodity per unit of time. Change in Total Utility
MU = --------------------------------------Change in Quantity Consumed

LAW OF DIMINISHING MARGINAL UTILITY

The

German Economist H. Gossen, who was first to explain the law, said that As the consumer consumes more and more units of a commodity, the utility from the successive units goes on diminishing. Marshall explains the law as The additional benefit, which a person derives from an increase of his stock of a thing, diminishes with every increase in the stock that he already has.

ASSUMPTIONS
The Unit of Consumption must be a Standard One. Consumption must be Continuous. Multiple Units of the Commodity should be Consumed. The tastes and preferences of the consumer should remain unchanged during the course of consumption. The good should be normal and not addictive in nature.

TOTAL & MARGINAL UTILITY

Units 1 2 3 4 5 6 7 Total utility 10 15 19 22 23 23 21 Marginal utility 10 5 4 3 1 0 -2

Total and Marginal Utility

TU

MU

LIMITATIONS OF THE LAW

Suitable

Units Suitable Time No Change in Consumers Tastes Rationality Rare Collections Fashion Not Applicable to Money

LAW OF DIMINISHING MARGINAL UTILITY - APPLICATIONS

Helps

in Taxation. Price Determination. Household Expenditure. Basis of law of Demand. Socialists View. Consumers Surplus Concept.

LAW OF EQUI-MARGINAL UTILITY

It is an extension of the law of Diminishing Marginal Utility to two or more commodities. Given the income of a consumer, the law states that consumer can get maximum satisfaction when the Marginal Utility of the last rupee spent on each commodity yield the same utility. To get maximum satisfaction, consumer will substitute one good for another. It is also called as Law of Substitution, Law of Indifference, or Law of Maximum Satisfaction.

LAW OF EQUI--MARGINAL UTILITY

Under Law of Equi- marginal utility, if the utility from a commodity X is more than that from another commodityY, then the consumer would reduce consumption of Y and increase consumption of X. Consumer equilibrium can be stated in the following formula. Mux / Px = MUy / Py = MUi Where MU = Marginal Utility P = Price i = Income

THE RESULTING MARGINAL UTILITY TABLE

Units of Money 1 2 3 4 5

MU x/ P x 11 10 9 8 7

MU y /P y 9 8 7 6 5

LIMITATIONS OF THE LAW

Rationality Effects of Fashion and Customs Ignorance Indivisible Units Questionable Assumptions

PRACTICAL IMPORTANCE OF THELAW

Applications to Consumption Applications to Production Applications to Exchange Price Determination Applications to Distribution

Thank

A consumer consumes two goods A and B and he makes five combinations a,b,c,d and e of the two substitute commodities. Combinations Units of Commodity

Indifference curve have a negative slope. Indifference curve of imperfect substitutes are convex to the origin.

Indifference curve do not intersect nor are they tangent to one another. Upper indifference curves indicate a higher level of satisfaction

CONSUMER EQUILIBRIUM

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. The consumer maximizes satisfaction by purchasing the combination of goods that is on the indifference curve farthest from the origin but attainable given the consumers budget.

INCOME EFFECT

The Income Effect is defined as the total change in the quantity consumed of a commodity due to change in its income.

The increase in demand on account of an increase in real income is known as income effect. The increase in real income encourages the consumer to demand more goods and services

PRICE EFFECT
The Price Effect is defined as the total change in the quantity consumed of a commodity due to change in its price. Price Consumption Curve is a locus of points of equilibrium on indifference curves, resulting from the change in the price of a commodity.

Substitution Effect arises due to the consumers inherent tendency to substitute cheaper goods for the relatively expensive ones.

CONCLUSION The indifference curve indicates what the consumer is willing to buy The budget line shows what the consumer is able to buy When the indifference curve and the budget line are combined, we find the quantities of each good the consumer is both willing and able to buy

Income Consumption Curve It is defined as a curve that joins different equilibrium points when the income of the consumer changes with fixed price.

INTRODUCTION

An Indifference Curve is defined as the locus of points each representing a different combination of two substitute goods, which yield the same utility or level of satisfaction to the customer. An Indifference Curve is also called as Iso-utility curve and Equal utility curve.