BY: JOHANNA YSABELLE ICASIANO

R-JHUN G. LEMOS
EDRIENGH JOHN C. LLUSALA
CONCEPT
OF
UTILITY
• Utility refers to want satisfying power
of a commodity. It is the satisfaction,
actual or expected, derived from the
consumption of a commodity. Utility
differs from person- to-person, place-
to-place and time-to-time.
• Economists assumed that utility can be measured in cardinal
(numerical) terms.
• By using cardinal measure of utility, it is possible to numerically
estimate utility, which a person derives from consumption of
goods and services.
• There was no standard unit for measuring utility. So, the
economists derived an imaginary measure, known as ‘Util’.
• Utils are imaginary and psychological units which are used to
measure satisfaction (utility) obtained from consumption of a
certain quantity of a commodity.
• Suppose you have just eaten an ice-cream and a
chocolate. You agree to assign 20 utils as utility
derived from the ice-cream. Now the question is: how
many utils be assigned to the chocolate? If you liked
the chocolate less, then you may assign utils less than
20.
• However, if you liked it more, you would give it a
number greater than 20. Suppose, you assign 10 utils
to the chocolate, then it can be concluded that you
liked the ice-cream twice as much as you liked the
chocolate.
• For example, an individual judges that a piece of pizza will
yield 10 utils and that a bowl of pasta will yield 12 utils, that
individual will know that eating the pasta will be more
satisfying. For the producers of pizza and pasta, knowing that
the average bowl of pasta will yield 2 additional utils will help
them price pasta slightly higher than pizza.
• Utils can decrease as the number of products or services as
consumption increases. The first slice of pizza may yield 10 utils,
but as more pizza is consumed, the utils may decrease as
people become full. This will help consumers understand how to
maximize their utility by allocating their money between
multiple types of goods and services as well as help companies
understand how to structure tiered pricing.
• is defined as the total amount of satisfaction that a person can
receive from the consumption of all units of a specific product or
service.
TU can be calculated as:
TUn = U1 + U2 + U3 +……………………. + Un
Where:
TUn = Total utility from n units of a given commodity
U1, U2, U3,……………. Un = Utility from the 1st, 2nd,
3rd nth unit
n = Number of units consumed
•is defined as the additional
utility gained from the
consumption of one additional
unit of a good or service
AND
•Refers to the quality or
amount of goods and
services desired by the
consumers.
•Refers to the quality or
amount of goods and
services desired by the
consumers.
• Price of Goods itself
• Consumers Income
• Consumer’s expectation of future prices
• Prices of related commodities
• Consumer’s tastes and preferences
• Population
•The relationship between the
quantity of a good demanded
and the price of that good.
Price ( PHP) Quantity Demanded
1 1000

2 800

3 600

4 400

5 200
• Shows graphically the relationship between the
quantity of a good demanded and its
corresponding price, with other variables held
constant
• The demand curve is typically downward-
sloping
•States that as price increases,
quantity demanded decreases;
and as price decreases,
quantity demanded increases,
if other factors remain constant.
• Income effect - When the price of goods
decreases, the consumer can afford to buy
more of it or vice versa.
• Substitution effect - It is expected that
consumers tend to buy goods with a lower
price.
•Maximum units/quantity of
goods or services producers can
offer
• Change in technology
State of the art technology that uses high-tech machines increases
the quantity supply of goods which causes the reduction of cost of
production.
• Cost of inputs used
An increase in the price of an input or the cost of production
decreases the quantity supplied because the profitability of
certain business decreases.
• Expectation of future price
When producers expect higher prices in the future commodities,
the tendency is to keep their goods and release them when the
price rises.
• Change in the price of related goods
Changes in the price of goods have a
significant effect in the supply of such
goods.
• Government regulation and taxes
It is expected that taxes imposed by the
government increases cost of production
which in turn discourages production
because it reduces producers’ earnings.
• Government subsidies
Subsidies or the financial aids/assistance
given by the government reduces cost of
production which encourages more supply
• Number of firms in the market
An increase in the number of firms in the
market leads to an increase in supply of
goods and services.
• The relationship between the
quantity of a good supplied and
its price.
• Shows graphically the quantity of a
good supplied at each price, with
other factors that affect quantity
supplied held constant.
• The supply curve is typically upward-
sloping
• States that as price increases,
quantity supplied also increases;
and as price decreases, quantity
supplied also decreases if other
factors remain constant.
TRUE OR FALSE
1. Utility is the satisfaction, actual or expected, derived
from the consumption of a commodity.
2. Total Utility defined as the additional utility gained
from the consumption of one additional unit of a
good or service.
3. The supply curve is typically upward-sloping
4. Demand Schedule is the relationship between the
quantity of a good demanded and the price of that
good.
5. Law of Supply states that as price increases,
quantity demanded decreases; and as price
decreases, quantity demanded increases,
• 1) TRUE
• 2) FALSE
• 3)FALSE
• 4) TRUE
• 5) FALSE