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Utility analysis

Consumer demand is the basis of all

productive activities.
Utility is the want satisfying power of a
commodity.
Utility is the psychological feeling of
satisfaction, pleasure, happiness, or well being
which a consumer derives from the
consumption, possession or the use of a
commodity.

Features
Utility is subjective : It deals with mental
satisfaction.
Utility is relative: It varies with time and place.
Utility is not essentially useful: A commodity
having utility need not be useful.

Concept of utility
Initial utility: Utility derived from the first unit

of a commodity.
Total utility: The aggregate of utilities
obtained from the consumption of different
units of commodity.
Marginal utility: The change that takes place
in the total utility by the consumption of an
additional unit of a commodity is called
marginal utility.
MU can be positive, negative or zero.

Relation between Total utility and


Marginal utility
Quantity

0
1
2
3
4
5
6

TU
0
8
14
18
20
20
18

MU
-8
6
4
2
0
-2

Description

Initial utility

Zero Utility
Negative utility

As more and more units of a commodity are

consumed, the marginal utility derived from


each successive unit goes on diminishing. TU
increases upto a limit.
MU of the first four units being positive, the
TU goes on increasing.
MU of fifth unit is zero. TU will be maximum.
MU of sixth unit is negative. TU of sixth unit
falls from 20 to 18.

MEASURE MENT OF
UTILITY
In terms of money- estimates what amount of

money a man is willing to pay for a thing.


In terms of units utility is measured in utils.

LAW OF DIMINISHING MARGINAL


UTILITY
As a consumer consume more and more units

of a commodity, total utility would go on


increasing but only upto a certain point,
beyond which, if one continue to consume any
subsequent unit, his total utility will start
decreasing.

Assumptions
Utility can be measured in the cardinal number

system.
MU of money remains constant.
MU of every commodity being used is of same quality
and size.
There is continuous consumption of the commodity.
Suitable quantity of the commodity is consumed.
No change in income.
No change in the price of the commodity and its
substitutes.
No change in the taste, fashion, habits, etc.

Exceptions
Rare things
Misers
Manner of consuming things

Importance of the law


Basis of the law of consumption Three laws
Law of equi marginal utility
Law of demand
Concept of consumer surplus
Variety in production and consumption
Diminishing

utility and increasing variety of goods explain the ever


increasing complexity of production and consumption.

Difference b/w value-in-use and value-in exchange


Value of diamond is more than that of water although utility of diamond
is far less than of water.
Price determination determined by its demand and supply.
Basis of progressive taxation If persons with more income are taxed

at higher rate, then they will have to make the same sacrifice as
persons with less income who at taxed at lower rate.
Advantage to the consumer MU= Price