3. • Utility is a term used by economists to describe
the measurement of "useful-ness" that a
consumer obtains from any good. An economic
good yields utility to the extent to which it's useful
for satisfying a consumer’s want or need.
• Although the concept of utility is abstract, it is a
useful way to explain how and why consumers
make their decisions.
• The economic utility of a good or service is
important to understand because it directly
influences the demand, and therefore price, of
that good or service. In practice, a consumer's
utility is usually impossible to measure or
quantify.
Utility Analysis
4. Measuring of Utility
Utility can be measured in two ways -:
● Cardinal utility is the utility wherein the satisfaction
derived by the consumers from the consumption of good or
service can be measured numerically.
● "Cardinal" utility is the idea of measuring economic value
through imaginary units, known as "utils."
● Ordinal utility states that the satisfaction which a consumer
derives from the consumption of product or service cannot
be measured numerically.
● "Ordinal" utility refers to the concept of one good being
more useful or desirable than another.
5. TYPES OF UTILITY
In economics, production refers to the creation of utilities in several
ways. The four types of economic utility are
form utility, time utility, place utility, and possession utility.
These terms refer to the psychological importance attached to
different forms of utility. For example, form utility is the result of the
design of a product or service, and time utility refers to the ability of
a company to provide services when the customers need them.
Kinds of Utility
Utility are of three kinds:
Marginal Utility:(Marginal utility is the utility derived from the last or
marginal unit of consumption.)
Total Utility:(Total Utility is the utility from all units of consumption. )
Average Utility:(Average Utility is that utility in which the total unit
of consumption of goods is divided by number of Total Units.)
6. Alfred Marshall, British Economist defines the law of diminishing marginal
utility as follows: “The additional benefit which a person derives from a
given increase in the stock of a thing diminishes with every increase
in the stock that he already has.” This law is based on the fundamental
tendency of human nature.
Assumptions:
Units of commodities consumed should be identical or homogeneous.
Units should be consumed in quick succession with minimal breaks in
minimal breaks in between.
Units should be of a standard size, that is, neither too big nor too small.
too big nor too small.
The taste of the consumers should be constant
A consumer must be rational, that is he can measure, calculate and
compare the utility of a different commodity.
THE LAW OF DIMINISHING MARGINAL UTILITY
7. “During the course of consumption, as more and more units of a
commodity are used, every successive unit gives utility with a
diminishing rate, provided other things remaining the same; although,
the total utility increases.”
Utils:'
Utils are considered as the measurable 'unit' of utility.
Suppose a person eats Bread and 1st unit of bread gives him maximum
satisfaction. When he will eat 2nd bread his total satisfaction would
increase. But the utility added by 2nd bread(MU) is less than the 1st
bread. His Total utility and marginal utility can be put in the form of a
following schedule.
EXPLANATION
8. Plotting the above data on a graph gives
In the given figure ,
Point of satiety(Zero MU)- denotes the point
at which satisfaction goes down to zero.
Marginal utility(MU) –along y-axis
Total utility (TU)–along y-axis
Unit of commodity consumed –along x-axis.
9. LIMITATIONS OF THE LAW
1. Case of intoxicants-
2. Not Applicable to money
3. Rare collections
4. Utility is subjective
5. Dissimilar units
6. Too long an interval
10. When marginal utility falls but is positive,
total utility increases in a diminishing manner.
• When marginal utility is zero, total utility
is maximum.
• When marginal utility is negative, total
utility declines.
Relationship between Marginal
Utility and Total Utility:
11. Law of Equi-Marginal Utility explains the relation
between the consumption of two or more products and
what combination of consumption these products will
give optimum satisfaction. Marginal Utility is the
additional satisfaction gained by consuming one more
unit of a commodity.
• This law is based on the principle of obtaining
maximum satisfaction from a limited income. It
explains the behavior of a consumer when he
consumes more than one commodity.
Law of Equi-Marginal Utility
12. • The law states that a consumer should spend his limited
income on different commodities in such a way that the last
rupee spent on each commodity yield him equal marginal
utility in order to get maximum satisfaction.
• Suppose there are different commodities like A, B, …, N. A
consumer will get the maximum satisfaction in the case of
equilibrium i.e.,
MUA / PA = MUB / PB = … = MUN / PN
Where MU’s are the marginal utilities for the commodities and P’s
are the prices of the commodities.
Some more about law...
13. 1. There is no change in the price of the goods or services.
2.The consumer has a fixed income.
3.The marginal utility of money is constant.
4.A consumer has perfect knowledge of utility.
5.Consumer tries to have maximum satisfaction.
6.The utility is measurable in cardinal terms.
7.There are substitutes for goods.
8.A consumer has many wants.
Assumptions of the Law
14. 1. The law is not applicable in case of knowledge. Reading books
provides more knowledge and has more utility.
2. This law is not applicable in case of fashion and customs.
3. This law is not applicable for very low income.
4. There is no measurement of utility.
5. Not all consumer care for variety.
6. The law fails when there are no choices available for the good.
7.The law fails in case of frequent price change.
Limitation of the Law
15. 1. This law is helpful in the field of production. A producer has limited
resources and tries to get maximum profit.
2. This law is helpful in the field of exchange. The exchange is of
anything like some goods, wealth, trade, import, and export.
3. It is applicable to public finance.
4. The law is useful for workers in allocating the time between the work
and rest.
5. It is useful in case of saving and spending.
6. It is useful to look for substitution in case of price rise.
Importance of the Law
16. Utility is subjective
The utility of a commodity is always
subjective because it depends
upon the consumer as much as
on commodity. It is the
psychological satisfaction as
feeling of the consumer. Hence,
it is internal not external
Utility is Relative and
Variable
Utility is highly relative and variable.
It varies from person to person
and from time to time or place to
place for the same individual.
Again, a same commodity can
give different utility to different
people
Utility and Pleasure
It is not necessary that a commodity possessing
utility also gives pleasure whenever it is
consumed. An injection possesses utility to an
individual. However, it gives him/her physical
pain. Hence, utility and pleasure are unrelated
Features of utility
17. Utility is Psychological
Utility of a commodity depends on a
consumer’s mental attitude and
assessment regarding its power to
satisfy his particular want.
Psychologically, every consumer has his
likes and dislikes and everyone
determines his own level of
satisfaction
Utility is Abstract:
It is abstract in a sense as it cannot be
seen or touched or felt. For example,
teaching of a teacher, advice of a
lawyer can neither be seen nor
touched. Hence, utility is abstract
Utility is independent
of morality
A commodity which satisfies any
type of want, whether moral or
immoral, socially desirable or
undesirable, has utility, i.e., a
knife has utility as a household
appliance to a housewife, but it
has also a utility to a killer for
stabbing some body.
18. What is Total
Utility?
Total utility is defined as a quantifiable summation of
satisfaction or happiness obtained from consuming multiple
units of a particular good or service.
It is the overall satisfaction that a consumer derives from the
consumption of particular goods and services. Each individual
unit of goods or services has a marginal utility of their own.
What is the purpose of Total utility ?
Utility and total utility are used in the economic analysis of
consumer behaviors within a marketplace.
In general, economic theories believe that consumer actions
are usually based on the goal of total utility maximization, which
leads to purchasing units perceived to have the greatest utility
satisfaction.
19. Calculating Total
Utility
Each individual unit of a good or service has its
own utility and each additional unit of consumption will
have its own marginal utility. The total utility will be the
aggregated sum of utility gained from all units being
studied.
A total utility formula will include utils. Utils are typically
relative and assigned a base value.
TU = U1 + MU2 + MU3 … ;
TU = Total Utility, U = Utility, MU = Marginal Utility
20. Graph
Total utility operates hand in hand
with marginal utility, which
measures the additional
satisfaction received from the
consumption of a good or service.
From the graph we understand
that as long as marginal utility is
positive, total utility will increase.
Once marginal utility is negative,
then total utility will decrease.
Example of Total Utility
Axel is craving for ice cream and decides to have a scoop of it. The first
scoop of ice cream provides Axel with 7 utils of happiness. He wants more
so he eats another scoop of ice cream, where his total utility is 12 utils. The
table in the next slide shows how Axel's utility changes as he consumes
additional scoops of ice cream.
21. Quantity Consumed Total Utility Marginal Utility
0 scoops 0 utils -
1 scoop 6 utils 6 utils
2 scoops 10 utils 4 utils
3 scoops 12 utils 2 utils
4 scoops 16 utils 0 utils
5 scoops 15 utils -2 utils
6 scoops 12 utils -4 utils
additional
The additional scoops provide Axel with
more utility up until the 4th scoop, at which
point Axel's utility is maximized.
Beyond 4 scoops we can see that Axel is
actually experiencing less and less total
happiness.
Axel's marginal utility decreases as he
consumes more ice cream. This is explained
by the fact that the second, third and fourth
scoops of ice cream were less satisfying to
him than the first scoop.
22. Total utility Marginal utility
What does it mean?
It is the aggregate of satisfaction that a
consumer derives from the consumption
of any particular goods or services.
It is the amount of satisfaction derived
by a consumer by additional
consumption of a unit of any particular
goods or services.
Rate of increase
Total utility rises as more consumption
is done, till maximun satisfaction is
achieved and thereafter decreases.
Marginal utility is always decreasing and
eventually becomes even negative.
The following table will help us understand the
significant points of difference between total utility and
marginal utility.
23. Total utility Marginal utility
Outcome
Total Utility always has a positive
outcome, no matter what.
Marginal Utility may be positive, zero or
even negative.
Point of Satiety
At this point, the Total Utility is
maximum.
Marginal Utility is exactly zero.
24. CONSUMER SURPLUS
Consumer surplus, also known as
consumer’s surplus or social
surplus, is the difference
between the actual price a
consumer paid for a product
and the maximum price they
were willing to pay. Put simply,
consumer surplus is the benefit
consumers feel when buying
something at a lower price than
expected.
25. CONSUMER SURPLUS
A consumer surplus happens when the price
consumers pay for a product or service is less than
the price they're willing to pay.
Consumer surplus is based on the economic theory
of marginal utility, which is the additional satisfaction
a consumer gains from one more unit of a good or
service.
Consumer surplus always increases as the price of a
good falls and decreases as the price of a good rises.
It is depicted visually by economists as the triangular
area under the demand curve between the market
price and what consumers would be willing to pay.
Consumer surplus plus producer surplus equals the
total economic surplus.
26. Airline tickets: Airline ticket prices change
rapidly, with countless sites dedicated to
guaranteeing consumers the lowest price. If you’re
willing to pay $500 for a flight from New York to
Los Angeles, but end up paying $300, you receive
$200 in consumer surplus. Sellers, however, know
that you are willing to pay more for a flight, and will
increase ticket prices before important dates like
Thanksgiving or summer vacation, thereby turning
consumer surplus into producer surplus.
Examples of Consumer Surplus
27. A consumer is said to be in an
equilibrium state when he feels that
he cannot change his situation either
by earning more or by spending more
or by changing the number of things
he buys. A rational consumer will
purchase a commodity up to the point
where the price of the commodity is
equivalent to the marginal utility
obtained from the thing.
What is Consumer
Equilibrium?
29. ● It enables consumers to maximize his/her utility from the
consumption of one or more commodities.
● It helps the consumers to arrange the combination of two or
more products based on consumer taste and preference for
maximum utility.
Importance of Consumer Equilibrium
