MANAGERIAL

ECONOMICS
Presented by :

Ashwani Kumar ( 10 / PMB / 019 )

Avnish Kr . Chauhan
( 10 / PMB / 021 )
ØMarginal Utility
ØIndifference Curve
ØBudget Line
ØConsumer Equilibrium
 THE CONCEPT OF UTILITY

In economics, the term ‘utility’ is used to denote

that quality of a commodity or service by virtue
of which our wants are satisfied.

In other words,
“ Want satisfying power of a good is called
utility .”
This is assumed to be measured in terms of
cardinal numbers, such as 1,2,3,4 etc. These numbers
are called utils or units of utility
 THE CONCEPT OF
MARGINAL UTILITY

It is the additional utility on account of the

consumption of an additional unit of a
commodity .

For example If a 10 units of a commodity yield

satisfaction of 100 utils , and 11 units of a commodity
yield satisfaction of 105 utils, then the additional
utility on account of consumption of 11th unit of the
commodity is:
105 - 100 = 5 utils .
This is called marginal utility.
 MEASUREMENT OF MARGINAL
UTILITY
UTILIT
The Marginal Utility ( MU ) is measured
as under :
MU = TUn – TUn-1

Referring to the above example

MU = TU11 – TU10
= 105 – 100 = 5 utils.
 ILLUSTRATI
ON
Table 1 . Gives an illustration on the
estimation of TU and MU .
Consumption of
commodity X TU X MU X
1[ units ] 100 100 [ TU 1 - TU 0 = 100 - 0
2 190 = 100 ]
3 270 90 [ TU 2 - TU 1 = 190 - 100 =
4 340 90 ]
5 400 80 [ TU 3 - TU 2 = 270 - 190 =
80 ]
70 [ TU 4 - TU 3 = 340 - 270 =
70 ]
The table shows : 60 [ TU 5 - TU 4 = 400 - 340 =
1 . MU = TU n – TU n-1 60 ]
2 . TU = ∑ MU = [ 100 + 90 + 80 + 70 + 60 ] = 400 .
 X
U TM / X
DIAGRAMATIC PRESENTATION

Consumption of X
( units )
 LAW OF DIMINISHING
MARGINAL

UTILITY
Law of diminishing marginal utility states that as
more and more standard units of a commodity are
continuously consumed , marginal utility derived from
every additional unit must decline, consumption of all
other goods being held constant It is also called
‘ Fundamental Law of Satisfaction ’
Diminishing MU implies that the TU will Increase
only at decreasing rate .
ASSUMPTIONS :
1.Various units of the goods are homogenous.
2.There is no time gap between consumption of the
different units
3.Consumer is rational
4.Tastes preferences and fashion remain unchanged
 INDIFFERENCE
CURVE
APPROACH
 ORDINAL
UTILITY
As, Utility is subjective , its measurement is not
possible in real life. So there is an alternative
approach developed by economists known as Ordinal
Utility theory , which deals with the consumers
behavior under the assumption that utility from
different units of good or between different goods
need only be rankable and not measurable.
For example: If a consumer gets more utility from
bundle A than from bundle B , it means that consumer
will rank bundle A above bundle B .
 FEATURES
1 . Rationality : A consumer aims to maximize his
utility (subject to income and prices) under
condition of certainty
2.
3 . Complete Ordering : All possible combination of
goods can be ordered into preferred, indifferent or
inferior combinations when compared to a given
combination of the good
4.
5 . Consistency : This Condition requires that if a
consumer prefers bundle A to bundle B, he does not ,
at the same time, prefers bundle B to Bundle to A
6.
7 . Transitivity : If a consumer prefers bundle A to
bundle B and bundle B to C, he prefers bundle A to
bundle C
8.
9 . Non - satiety : A bigger bundle is preferred to a
smaller bundle
 INDIFFERENCE CURVE

A curve that shows different combination of two goods

yielding the same level of utility to consumer is known
as Indifference Curve (Equal –utility Curve).
Since all points on the curve yield equal satisfaction,
the consumer likes equally all the combinations and is,
therefore, indifferent between these combinations.

COMBINATION Unit of Good X Unit of Good Y

A 1 30
Indifference B 2 24
Schedule C 3 19
D 4 15
E 5 12
 AN INDIFFERENCE CURVE
Y FO STINU

Indifference Curve

UNITS OF X

An Indifference Curve
BUDGET LINE
OR
ISO -
EXPENDITURE
LINE
 BUDGET LINE OR
ISO - EXPENDITURE LINE
A consumer's budget line characterizes on a graph the
maximum amounts of goods that the consumer can
afford.
( i ) a preference for that good and ( ii )
purchasing power to buy the good . His preference
pattern is represented by a set of indifference curves,
while his purchasing power depends upon his money
income and market prices of the goods.

E= Qx . Px +
Qy . Py
where E = Expenditure on goods X and Y;
Q x and Q y =Quantity of Good X and Y
respectively; and
 THE BUDGET
nit of Good X
LINE

E / Py

Not Affordable

Budget Line
Affordable

E / Py
Unit of Good Y
 ILLUSTRATION
Let a consumer has:
E = Rs . 2000 ,
Px = Rs . 50 and
Py = Rs . 40 .

The maximum amount of X which he can be found from

his
budget equation:
2000 = 50 ( Q x ) + 40 ( 0 ) or Q x =40

Similarly we find the maximum amount of Q y = 50

So the combination ( 40 , 0 ) and ( 0 , 50 ) are possible

consumption bundles within the budgeted amount of
many. By joining these two points in graph we get the
budget line AB.
 CONSUMER ’ S
EQUILIBRI UM
 CONSUMER ’ S EQUILIBRIUM
In consumer equilibrium, you allocate income between the
purchase of different goods in such a way that you cannot
increase your level of utility, that is, you have achieved
utility maximization.

Determination of consumer equilibrium :

If there is only two good A and B. The consumer knows the
prices A and B and has a fixed budget that can be used to
purchase quantities of A and B. The consumer will purchase
quantities of A and B so as to completely exhaust the
budget for such purchases. The actual quantities purchased
of each good are determined by the condition for consumer
equilibrium, which is :
Marginal Utility Of A Marginal
Utility Of B
Price Of A
 CONSUMER ’ S
EQUILIBRIUM
B
C
D
Y FO STINU

E
Y* I4
I3
F I2
G I1

X* UNITS OF X A
 ILLUSTRATION
Price of A = Rs . 2 ,
Price of B = Rs . 1 ,
Budget = Rs . 5

Units of MU of A MU / Price of A Units of B MU of B MU / Price of

A B
1 24 12 1 9 9
2 18 9 2 8 8
3 12 6 3 5 5
4 6 3 4 1 1
THANK YOU
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