Utitlity

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Information about Utitlity

Published on April 18, 2014

Author: kiyani007

Source: slideshare.net

Description

utility and their approaches

UTILITY ANALYSIS

UTILITY  Background: The concept of utility was introduced for the first time by “WILLIAM STANLEY JEVONS” (1834-1882) of great Britain. further worked by “CARL MENGER” & “LEON WALRAS” According to them: “utility is a subjective concept on the basis of which people demand a commodity”.

UTILITY  Definition: In objective terms, utility may be defined as the “amount of satisfaction derived from a commodity or service at a particular time”.  Meaning: Utility may not be confused with usefulness as it is purely subjective satisfaction derived from the consumption of a commodity.  Example: water has the ability to slake thirst, pen has ability to write.

UTILITY Characteristics of utility:  Dependent upon human wants.  Immeasurable.  Utility depend upon use.  Utility is subjective.  Utility depends upon shape.  Utility depends upon on knowledge.  Utility depends upon ownership.

 Initial Utility- Satisfaction Derived from very first unit consumed of any object.  Total Utility – Total Satisfaction derived from the product.  Marginal Utility- The word Marginal means “Border” or “Edge”. It is the addition made to the total utility by consuming one more unit of a commodity.  Relationship between Total Utility, and Marginal Utility. CONCEPTS OF UTILITY

RELATION BETWEEN TU & MU Quantity TU MU Description 0 0 -- 1 8 8 Initial 2 14 6 3 18 4 Positive 4 20 2 5 20 0 Zero 6 18 -2 Negative

CARDINAL & ORDINAL APPROACH

Cardinal Utility Analysis and Ordinal Utility Analysis Cardinal Utility analysis Ordinal Utility Analysis Utility Analysis • Alfred Marshal • can be measured • „Utils‟ • Law of Diminishing Marginal Utility •Law of Equi-marginal Utility • J. R. Hicks & R.G.D. Allen •Cannot be measured but compared as rank • Indifference Curve analysis

CARDINAL AND ORDINAL UTILITY  Cardinal Utility: The numbers 1, 2, 3, 4 are cardinal numbers. For example the number 2 is twice the size of 1. In the same way, the number 4 is four times the size of number 1.  Alfred Marshall developed cardinal utility analysis.  According to cardinal approach, utility can be measured.  The exponents of the utility analysis have developed two laws which occupy a very important place in economics theory and they are :-  Law of Diminishing Marginal Utility  Law of Equi-Marginal Utility

LAW OF DIMINISHING MARGINAL UTILITY  H.H Gossen was the first economist to explain the law of diminishing marginal utility, and the law of equi marginal utility in 1854.  W.S Jevons named them as Gossen first and second laws of consumption (1871).  In 1890 Marshall in his “Principle of Economics” developed this analysis in a refined manner.  Alfred Marshall defines the „Law of Diminishing Marginal Utility‟ as “The additional benefit which a person derives from a given increase of his stock of a thing diminishes with every increase in the stock that he already has.”

LAW OF DIMINISHING MARGINAL UTILITY  Statement: “If other things do not change and a consumer increases the use of a commodity, the utility of every new unit of the commodity will be less than the utility of the previous unit.”

DIAGRAM & TABLE EXPLANATION The Law of Diminishing Marginal Utility -5 0 5 10 15 20 25 30 35 1 2 3 4 5 6 7 X goods Total/MarginalUtilities X Units Total Utility Marginal Utility 1 10 - 2 18 8 3 24 6 4 28 4 5 30 2 6 30 0 7 28 -2 TUC MUC

Assumptions:  All the units of a commodity must be same in all respects.  The unit of the good must be standard.  There should be no change in taste during the process of consumption.  There must be continuity in consumption.  There should be no change in the price of the substitute goods. LAW OF DIMINISHING MARGINAL UTILITY

Exceptions:  Money  Hobbies  Rare Things  Liquor  Music  Things of Display LAW OF DIMINISHING MARGINAL UTILITY

THE LAW OF EQUI MARGINAL UTILITY:  Gossen Second Law DEFINTION:  The law of equi marginal utility explains as to how a consumer distributes his limited income among various commodities.  Consumer will spend his income in such away that the last rupee spent on each of the commodity gives him the same marginal utility.  Therefore, this law is known as the Law of Equi-Marginal Utility.

Units Mux Muy 1 10(1) 8 (2) 2 8 (3) 6 (4) 3 6 (5) 4 4 4 2 5 2 0 Total 30 20 0 2 4 6 8 10 12 1 2 3 4 5 MarginalUtility Quantity of commodities Equi-Marginal Utility THE LAW OF EQUI MARGINAL UTILITY:

EXCEPTION OF LAW:  Fashion  Ignorance  Indivisible  Time Factor

ORDINAL UTILITY Ordinal utility:  The numbers 1st, 2nd, 3rd, and 4th, are ordinal numbers. These ordinal numbers are ranked or ordered. This ranking does not explain the actual size relation of the numbers. The second one might or might not be twice as big as the first one.  Hicks and Allen used ordinal utility approach for analyzing the consumer behavior.  This analysis is known as indifference curve analysis. The Indifference Curve: An indifference curve is the locus of infinite combinations of two commodities which yield the same total utility to the consumer.

INDIFFERENCE CURVE AND TABLE COMBINATI ON Good X (tea) Good Y (coffee) A 1 15 B 2 10 C 3 6 D 4 3 E 5 1 0 2 4 6 8 10 12 14 16 0 2 4 6 Indiffence Curve

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