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Studymaterial Unit2 UtilityIntro

Utility refers to the satisfaction or benefit derived from consuming a good or service. It can be measured cardinally by assigning numbers, or ordinally by preferences. There are two types of utility - total utility is the satisfaction from consuming multiple units, while marginal utility is the change in total utility from an additional unit. As consumption of a good increases, marginal utility diminishes according to the law of diminishing marginal utility, as shown through examples of consuming multiple ice creams.

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14 views26 pages

Studymaterial Unit2 UtilityIntro

Utility refers to the satisfaction or benefit derived from consuming a good or service. It can be measured cardinally by assigning numbers, or ordinally by preferences. There are two types of utility - total utility is the satisfaction from consuming multiple units, while marginal utility is the change in total utility from an additional unit. As consumption of a good increases, marginal utility diminishes according to the law of diminishing marginal utility, as shown through examples of consuming multiple ice creams.

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Shikha Singh
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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What is Utility?

Product angle: Want satisfying property of any


product (absolute).
Consumer angle: The psychological feeling of
satisfaction or happiness or well being or benefit
derived by the consumer by the consumption of
certain units of a good or service at a certain point
of time (subjective).
Utility can be measured in two ways:

Cardinal Utility:Assigning numerical values to the amount


of satisfaction

Ordinal Utility:: Not assigning numerical values to the

amount of satisfaction but indicating the order of preferences,


that is, what is preferred to what
Utility is of two types:

 Total Utility
 Marginal Utility
Total Utility

• Sum of utility derived by consumer from multiple units


consumed
• at a point or over a period of time
• Example: A consumer consumes 3 units of X and
• derives utility u1, u2, u3 and u4
• Total Utility Ux= u1 + u2 + u3
Total Utility
• The total satisfaction of wants & needs
obtained from the consumption of goods &
services
• Based on the presumption that the amount of
utility generated from the consumption of a
good can be explicitly measures
• Hypothetical measure is util
Marginal Utility

The change in total utility (TU) derived from

• one additional unit of consumption (X)

MU = TU/ X
Table : Total Utility (TU) and Marginal Utility (MU)

Ice-creams Total Utility Marginal Utility


Consumed (TUx) (MUx)
1 20 20

2 36 16

3 46 10

4 50 4

5 50 0

6 44 -6
• The first column is showing the unit of a commodity. Second
column of the above table gives and individuals hypothetical total
utility (tu) from consuming various alternative quantities of
commodity X . There it is noted that, as the individual consumes
more unit of X, Tux increases.
• The Third column of the table is showing the individuals marginal
Utility for commodity X. each value of column three is obtain by
subtracting two successive value of column two. For example, If the
individuals consumption of X goes from 1 unit to 2 units, the (tux )
goes from 20 to 36 utilities, giving a MUx of 16. Similarly if the
consumption of X rises from 2 units to 3 units, the (Tux) rises from
36 to 46, giving a MUx from 16 to 10. From the table we can see
that as this individuals consumption more Units of X, MUx falls.
Total Utility and Marginal Utility curve
• In Fig, units of ice-cream, are shown along the X-axis
and TU and MU are measured along the Y-axis. MU is
positive and TU is increasing till the 4th ice-cream. After
consuming the 5th ice-cream, MU is zero and TU is
maximum.
• This point is known as the point of satiety or the stage
of maximum satisfaction. After consuming the 6th ice-
cream, MU is negative (known as disutility) and total
utility starts diminishing. Disutility is the opposite of
utility. It refers to loss of satisfaction due to
consumption of too much of a thing.
Basic Assumptions of Marginal Utility Analysis

(i) Cardinal Measurement of Utility


(ii) Utilities are Independent
(iii) Constant Marginal Utility of Money
(iv) Introspection
• (i) Cardinal Measurement of Utility: Marginal utility analysis assumes in
the first place that utility can be measured and the exact measurement
can be given by assigning definite numbers such as 1, 2, 3, etc. That is, it is
assumed that utility is a quantifiable entity.
• (ii) Utilities are Independent: Marginal utility analysis assumes that the
utilities of different commodities are independent of one another. That is,
the utility of one commodity does not in any way affect that of another.
• (iii) Constant Marginal Utility of Money: Another important assumption
of the marginal utility analysis is that the marginal utility of money
remains constant even though the quantity of money with the consumer
is diminished by the successive purchases made by him.
• (iv) Introspection: The Marginal Utility analysis also assumes that from
one’s own experience (judging what happens in one’s own mind), it is
possible to draw inference about person. This is self-observation applied
to another person.
Law of Diminishing Marginal Utility

• “As the quantity consumed of a commodity


goes on increasing, the utility derived from
each successive unit goes on diminishing,
consumption of all other commodities
remaining the same” When the changes in
consumption are infinitely small, marginal
utility is the derivative of total utility.
MU = dTU/dX
Law of Diminishing Marginal Utility
Example
As an example assume you have one ice cream

1 Ice Cream you feel Ecstatic


You have a second Ice cream

2nd Ice Cream, u still feel Ecstatic


You have the third Ice cream

3rd Ice Cream You Feel Very Happy


You have the fourth Ice Cream

4th Ice Cream You Feel Happy


You have the fifth Ice Cream,

5th Ice Cream You Still Feel Happy


You have the sixth Ice Cream

6th Ice Cream You are not so Happy


You have the seventh Ice Cream

7th Ice Cream You are not so Happy


You have the eighth Ice Cream

8th Ice Cream You fall sick


The following table will make the law of diminishing marginal
utility more clear

Units Total Utility Marginal Utility


1st ice cream 20 20
2nd ice cream 32 12
3rd ice cream 40 8
4th ice cream 44 4
5th ice cream 45 1
6th ice cream 45 0
7TH ice cream 42 -3
8th ice cream 40 -5
Conclusion
• We can say that the law of diminishing utility,
like other laws of Economics, is simply a
statement of tendency. It holds good,
provided other factors remain constant.

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