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UTILITY

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Utility

Utility is the benefit orsatisfaction that a persongets from the consumption

of a good or service.

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Utility Theory

First: Cardinal

Second: Ordinal

cardinal utility means supplythat can be measured innumbers such as electricity,

gas, water, etc. and Whileordinal utility refers tosatisfaction that one gets form

consumption .

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Utility derived from consumptionof different goods and services

may be considered as differenttypes:utility from eating to meethunger or pleasure,

utility of insurance is removal ofthe fear from unprotected risk oruncertainty.Utility from movies may be

entertainment utility.

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Total Utility

Total utility is the total benefit that aperson gets from the consumption of a

good or service as the sum total all.

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Marginal Utility (MU)

the change in total utility when

consumption of a good changesby one unit.

MU = (TU / ( C consumed of

a good

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Lets take an exampleNo of commodity Total utility Marginal utility

1 30 30 or 0

2 50 20

3 60 10

4 65 5

5 60 -5

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C

TU

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C

MU

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Law of Diminishing Marginal

UtilityThe law of diminishing marginal utility

states that as the consumption ofquantity of a commodity increase theutility derived from each successive unitdecreases if consumption of all the othercommodities remains same it means thetotal utility increase as to increase thenumber of unit.

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Law of Diminishing Marginal

Utility

Example

If Im really hungry, I get a lot ofsatisfaction from first slice of pizza.

If I keep eating pizza, the satisfactionfrom the 8th slice would be much less

than that of the first slice.

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Assumption of this law

1. The unit of consumer must be standered.

2. Consumer test & preference remains same.

3. The mental condition of consumer remainssame.

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Consumer Equilibrium

Lets say I walk down to thecafeteria for lunch and they have

Pizza and Ice Cream. The pizza is $1 a slice and the Ice

Cream is $2 a scoop. I have $7 in

my pocket What do I buy?

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Utility Table

0 0 -- 0 --

1 24 24 29 29

2 44 20 46 17

3 60 16 56 10

4 70 10 58 2

5 72 2 59 1

6 72 0 59 0

Quantity Total Util. MarginalUtil. Total Util.MarginalUtil.

Ice Cream Pizza

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We need to find the marginal utility perdollar for both goods.

Consider the first scoop of ice cream -MU 12 per dollar. MU of the first slice ofpizza 29 per dollar. So I want to buythe pizza. Now I have $6.

Now I have to compare my second slice

of pizza (MU is 17 /$) with the firstscoop of ice cream (MU is 12 /$). I willwant to buy the second slice of pizza. Ihave $5.

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Now I have to compare the third slice opizza (MU 10/$) with the first scoop of ice

cream (MU 12/$). I will want to buy theice cream. I have $3.

Now I have to compare the third slice ofpizza (MU 10 /$) with the second scoop of

ice cream (MU 10 /$). It doesnt matterwhich I pick, since they make me equallyhappy. Ill take the pizza. Now I have $2

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Consumer Equilbrium

Now I have to compare the fourth sliceof pizza (MU is 2/$) to the second scoopof ice cream (MU is 10 /$). I will want

to buy the ice cream. I have no moremoney.

I bought 3 slices of pizza which give atotal utility of 56 and 2 scoops of ice

cream which give a total utility of 44.My total utility from lunch is56+44=100. There is no othercombination of pizza and ice cream that

give a greater utility for $7.

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Demand & utility Demand is directly proportional to

utility.

If utility of any thing increase thenthe demand of such thing increaseautomatically.

The relation between demand andutility is given as

D U

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Questions

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THANKS YOUSAURABH K.

GARGRAMBABU SAINI

RAMNARAYAN

KUMAWAT

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