marginal utility-analysis
TRANSCRIPT
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UTILITY ANALYSISUTILITY ANALYSIS
UtilityUtility isis thethe PowerPower ofof aa CommodityCommodity toto satisfysatisfyhumanhuman wantswants..
ThereThere areare twotwo differentdifferent ApproachesApproaches toto UtilityUtilityAnalysisAnalysis
1.1. CardinalCardinal approachapproach toto utilityutility analysisanalysis
2.2. OrdinalOrdinal approachapproach toto utilityutility analysisanalysis
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CARDINAL APPROACHCARDINAL APPROACH
ThisThis SchoolSchool believesbelieves thatthat UtilityUtility isis MeasurableMeasurableandand isis aa QuantifiableQuantifiable entityentity..
CardinalCardinal ApproachApproach givesgives exactexact measurementmeasurement byby
assigningassigning definitedefinite numbersnumbers suchsuch asas 11,, 22,, 33,, etcetc..
Assumptions of the Cardinal Marginal UtilityAssumptions of the Cardinal Marginal Utility
1.1. CardinalCardinal MeasurementMeasurement ofof UtilityUtility2.2. UtilitiesUtilities areare IndependentIndependent
3.3. ConstantConstant MarginalMarginal UtilityUtility ofof MoneyMoney
4.4. IntrospectionIntrospection
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TOTAL AND MARGINAL UTILITYTOTAL AND MARGINAL UTILITY
TotalTotal UtilityUtility isis thethe sumsum totaltotal ofof thethe unitsunits ofof utilityutility whichwhichanan individualindividual derivesderives fromfrom thethe consumptionconsumption ofof aacommoditycommodity duringduring aa specifiedspecified periodperiod ofof timetime..
Marginal
Marginal UtilityUtility isis thethe changechange inin thethe totaltotal utilityutilityresultingresulting fromfrom aa oneone--unitunit changechange inin thethe consumptionconsumption ofof
aa commoditycommodity perper unitunit ofof timetime..
Marginal
Marginal UtilityUtility isis thethe additionaddition mademade toto thethe totaltotal utilityutilityby by thethe consumptionconsumption ofof thethe lastlast unitunit consideredconsidered justjust
worthwhileworthwhile..
MUMU == ChangeChange inin TotalTotal UtilityUtility
ChangeChange inin QuantityQuantity ConsumedConsumed
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Total & Marginal Utility RelationshipTotal & Marginal Utility Relationship
TotalTotal UtilityUtility startsstarts increasingincreasing byby decreasingdecreasing rateratewhilewhile MarginalMarginal UtilityUtility startsstarts decreasingdecreasing..
WhenWhen TotalTotal UtilityUtility isis atat itsits maximummaximum pointpoint andandthereafterthereafter startsstarts decreasing,decreasing, MarginalMarginal UtilityUtilitycomescomes toto zerozero..
AfterAfter thethe maximummaximum pointpoint hashas beenbeen achievedachieved bybytotaltotal utilityutility itit startsstarts decreasingdecreasing whichwhich causescausesmarginalmarginal utilityutility toto becomebecome negativenegative..
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LAW OF DIMINISHING MARGINALLAW OF DIMINISHING MARGINAL
UTILITYUTILITY
TheThe GermanGerman EconomistEconomist HH.. GossenGossen whowho waswas firstfirst toto
explainexplain thethe lawlaw saidsaid thatthat AsAs thethe consumerconsumer consumesconsumes
moremore andand moremore unitsunits of of aa commodity,commodity, thethe utilityutility fromfrom
thethe successivesuccessive unitsunits goesgoes onon diminishingdiminishing..
MarshallMarshall explainsexplains thethe lawlaw asas TheThe additionaladditional benefit,benefit,
whichwhich aa personperson derivesderives fromfrom anan increaseincrease of of hishis stockstock ofof
aa thing,thing, diminishesdiminishes withwith everyevery increaseincrease inin thethe stockstock thatthathehe alreadyalready hashas..
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TOTAL & MARGINAL UTILITYTOTAL & MARGINAL UTILITY
UnitsUnits Total utility Total utility Marginal utilityMarginal utility
11 1010 1010
22 1515 5 (155 (15--10)10)33 1919 4 (194 (19--15)15)
44 2222 3 (223 (22--19)19)
55 2323 1 (231 (23--22)22)66 2323 0 (230 (23--23)23)
77 2121 --2 (212 (21--23)23)
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DIMINISHING MARGINAL UTILITY
FIGURE
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LIMITATIONS OF THE LAWLIMITATIONS OF THE LAW
Homogeneous UnitsHomogeneous Units Suitable TimeSuitable Time
No Change in Consumers TasteNo Change in Consumers Taste
RationalityRationality Price of the substitute goodsPrice of the substitute goods
FashionFashion
Not Applicable to MoneyNot Applicable to Money
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LAW OF EQUILAW OF EQUI--MARGINAL UTILITYMARGINAL UTILITY
ItIt isis anan extensionextension ofof thethe lawlaw ofofD
iminishingD
iminishing MarginalMarginalUtilityUtility toto twotwo oror moremore commoditiescommodities..
GivenGiven thethe incomeincome ofof aa consumer,consumer, thethe lawlaw statesstates thatthat
consumerconsumer cancan getget maximummaximum satisfactionsatisfaction whenwhen thetheMarginalMarginal UtilityUtility ofof thethe lastlast rupeerupee spentspent onon eacheachcommoditycommodity yieldyield thethe samesame utilityutility..
ToTo getget maximummaximum satisfaction,satisfaction, consumerconsumer willwill substitutesubstituteoneone goodgood forfor anotheranother..
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LAW OF EQUILAW OF EQUI--MARGINAL UTILITYMARGINAL UTILITY
UnderUnder LawLaw ofof EquiEqui--marginalmarginal utilityutility consumerconsumer
equilibriumequilibrium cancan bebe statedstated inin thethe followingfollowing formulaformula..
MUMUxx == MUMUyy
PxPx PyPy
IfIf therther areare moremore thanthan twotwo goodsgoods then,then,
MUMUxx == MUMUyy == MUMUnn ==
PxPx PyPy PnPn
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EXAMPLEEXAMPLE SupposeSuppose consumerconsumer isis buying buying twotwo GoodsGoods XX andand YY andand
marginalmarginal utilityutility ofof themthem areare givengiven asas
SupposeSuppose thethe pricesprices ofof goodgood XX && YY areare RsRs.. 22 && RsRs..33respectivelyrespectively andand totaltotal incomeincome isis RsRs..2424.. TheThe aboveabove tabletablecancan bebe reconstructedreconstructed byby dividingdividing thethe marginalmarginal utilitiesutilities ofof
goodgood XX byby RsRs.. 22 andand marginalmarginal utilitiesutilities ofof goodgood yy byby RsRs.. 33..
Units of X & YUnits of X & Y MU xMU x MU yMU y
11 2020 2424
22 1818 2121
33 1616 1818
44 1414 1515
55 1212 1212
66 1010 99
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The Resulting Marginal Utility TableThe Resulting Marginal Utility Table
Units of MoneyUnits of Money MU xMU x
P xP x
MU yMU y
P yP y
11 1010 88
22 99 77
33 88 66
44 77 55
55 66 44
66 55 33
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LIMITATIONS OF THE LAWLIMITATIONS OF THE LAW
RationalityRationality
Effects of Fashion and CustomsEffects of Fashion and Customs
IgnoranceIgnorance
Indivisible UnitsIndivisible Units
Questionable AssumptionsQuestionable Assumptions