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SKY EDUCATION
ECONOMICS
CHP 2: UTILITY ANALYSIS

Q.1. Explain Utility and Features of Utility.

Ans: Following are the Features of Utility: (SHORTCODE: MRS BHIDE)
1) Utility is Multi-purpose :
A commodity can satisfy the want of more than one person, it can also be put to several uses. For example, electricity
can be used to serve many purposes and for many people at some point of time.
2) Relative concept :
Utility is related to time and place. It varies from time to time and place to place. For example,
(i) woollen clothes have a greater utility in the winter. (ii) sand has greater utility at the construction site than at the sea
shore.
3) Subjective concept :
It is a psychological concept. Utility differs from person to person. This is due to differences in taste, preferences, likes,
dislikes, nature, habits, profession etc. For example, stethoscope has utility to a doctor but not to a layman.
4) Utility is the Basis of demand :
A person will demand a commodity only if it gives utility to him. For example, a sick person has utility in medicines
hence, he demands medicines.
5) Measurement of utility is hypothetical :
Utility is an abstract concept. Cardinal or numerical measurement of utility is not possible. For example, a thirsty person
after drinking water, may derive higher or lower level of utility. Thus, utility can only be experienced and found either
positive, zero or negative. Negative utility is called disutility.
6) Utility depends on the intensity of want :
Utility depends on the intensity of a want. More intense the want, greater will be the utility. As and when the urgency of
want declines, utility diminishes. For example, a hungry person finds more utility in food, than a person who is not
hungry.
7) Utility differs from usefulness :
Utility is the capacity of a commodity to satisfy human wants, whereas usefulness indicates value in use of the
commodity. For example, milk has both utility as well as usefulness to a consumer, while liquor has utility only to an
addict, but has no usefulness.
8) Utility differs from pleasure :
A commodity may possess utility but it may not give any pleasure to the consumer. For example, injection for a patient
has utility because it cures the ailment but it hardly gives any enjoyment or pleasure to him.
9) Utility differs from satisfaction :
Utility is a cause of consumption, satisfaction is the end result of consumption. They are interrelated but still different
concepts. For example, a thirsty person drinks a glass of water since water has the capacity to satisfy thirst. Utility of
water is the cause of consumption and the satisfaction derived is the end result of consumption.

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10) Ethically neutral concept :

The concept of utility has no ethical consideration. It is a morally colourless concept. The commodity should satisfy any
want of a person without consideration of what is good or bad, desirable or undesirable. For example, a knife has utility
to cut fruits and vegetables as well as it can be used to harm someone. Both wants are of different nature but are
satisfied by the same commodity. Thus, utility is ethically neutral.

Q.2. Explain Relationship between Total Utility and Marginal Utility .

Ans: Marginal utility derived from various units of a commodity and its total utility are interrelated. This can be easily
followed from the hypothetical example given in the table
Utility Schedule:
Unit of x Total Utility Marginal Utility
1 10 10
2 18 8
3 24 6
4 28 4
5 30 2
6 30 0
7 28 -2
Table explains the relationship between total utility and marginal utility. On the basis of Table Total utility and Marginal
Utility curves (TU and MU) can be derived with the following diagram.

TU Curve = Total Utility Curve

MU Curve = Marginal Utility Curve
X axis measures the units of the commodity consumed while Y axis indicates the figures of total and marginal utility.
Figure shows that total utility curve slopes upwards whereas marginal utility curve slopes downwards. Marginal utility
curve shows zero and negative levels of marginal utility whereas total utility curve shows maximum and constant total
utility level.
1) Total utility and marginal utility of the very first unit of x consumed, are the same.

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2) As the consumer consumes further units of x, the total utility increases at a diminishing rate and marginal utility goes
on diminishing.
3) At a particular stage, total utility reaches to its maximum and remains constant whereas marginal utility becomes
zero. This is called the point of satiety.
4) After this point, any additional unit consumed further results in a decline in the total utility, while marginal utility
becomes MU negative)negative.
5) After reaching the point of satiety, a rational consumer should stop his consumption since the maximum limit of
satisfaction is reached and there is no addition to total utility by any further increase in the stock of a commodity.
6) Consumption beyond the point of satiety transforms satisfaction into dissatisfaction. In other words, a consumer
starts experiencing ill effects of consumption.

Q.3. State and explain the law of diminishing marginal utility with exceptions.
Ans:
Introduction :
This law was first proposed by Prof. Gossen but was discussed in detail by Prof. Alfred Marshall in his book ‘Principles of
Economics’ published in 1890. The law of diminishing marginal utility is universal in character. It is based on the common
consumer behaviour that utility derived diminishes with the reduction in the intensity of a want.
Statement of the Law :
According to Prof. Alfred Marshall, “Other things remaining constant, the additional benefit which a person derives from
a given increase in his stock of a thing, diminishes with every increase in the stock that he already has.”In other words,
marginal utility that any consumer derives from successive units of a particular commodity goes on diminishing as his or
her total consumption of that commodity increases. In short, the more of a thing you have, the less you want to have
more of it.
This table explains the Law of Diminishing Marginal Utility.
Unit of X Marginal Utility (MU)
1 10
2 8
3 6
4 4
5 2
6 0
7 -2

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The table shows that marginal utility keeps on diminishing with increase in consumption, further it becomes zero and
then negative.

Explanation of the Diagram :

In the above diagram, units of commodity x are measured on X axis and marginal utility is measured on Y axis. Various
points of MU are plotted on the graph as per the given schedule. When the locus of all the points is joined, MU curve is
derived. MU curve slopes downwards from left to right which shows that MU goes on diminishing with every successive
increase in the consumption of a commodity. When MU becomes zero, MU curve intercepts the X axis. Further
consumption of a commodity brings disutility (negative utility) which is shown by the shaded portion in the diagram.
Following are the assumptions to the law of diminishing marginal utility : (DeaR HSC)
1) Divisibility :
The law assumes that the commodity consumed by the consumer is divisible so that it can be acquired in small
quantities.
2) Rationality :
Consumer is assumed to be rational. It means that his behaviour is normal and he tries to maximize his satisfaction.
3) Reasonability :
All the units of a commodity consumed are of reasonable size. They are neither too big nor too small.
4) Homogeneity :
All units of a commodity consumed are exactly homogeneous or identical in size, shape, colour, taste etc.
5) Single want :
A given commodity can satisfy a single want of a person. The law assumes an experience of a single want which is
completely satiable at a given point of time.
6) Cardinal measurement :
The law assumes that utility can be cardinally or numerically measured. Hence, mathematical operations are easily
possible to know and compare the utility derived from each unit of a commodity.

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7) Continuity :
All units of commodity are consumed in quick succession without any lapse of time.
8) Constancy :
All the related factors like income, tastes, habits, choices, likes, dislikes of a consumer should remain constant. Marginal
utility of money is also assumed to be constant.

Following are the exceptions to the law of diminishing marginal utility : (H MAP)
1) Hobbies :
In certain hobbies like collection of various stamps and coins, rare paintings, music, reading etc., the law does not hold
true because every additional increase in the stock gives more pleasure. This increases marginal utility. However, this
violates the assumption of homogeneity and continuity.
2) Miser :
In the case of a miser, every additional rupee gives him more and more satisfaction. Marginal utility of money tends to
increase with an increase in his stock of money. However, this situation ignores the assumption of rationality.
3) Money :
It is said that the MU of money never becomes zero. It increases when the stock of money increases. This is because
money is a medium of exchange which is used to satisfy various wants. However, according to some economists, this
law is applicable to money too. For example, marginal utility of money is more to a poor person than to a rich person.
However, these, exceptions are only apparent. Since they violate some or the other assumptions of the law and hence,
they are not real exceptions.
4)Addictions :
It is observed in case of a drunkard that the level of intoxication increases with every additional unit of liquor consumed.
So MU received by drunkard may increase. Actually it is only an illusion. This condition is similar to almost all addictions.
However, this violates the assumption of rationality.
5) Power :
This is an exception to the law because when a person acquires power, his lust for power increases. He desires to have
more and more of it. However, this again violates the rationality assumption.

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