Utility analysis

Utility analysis

Consumer demand is the basis of all productive activities.Utility is the want satisfying power of a commodity.Utility is the psychological feeling of satisfaction, pleasure, happiness, or well being which a consumer derives from the consumption, possession or the use of a commodity.

FeaturesUtility is subjective : It deals with mental satisfaction.Utility is relative: It varies with time and place.Utility is not essentially useful: A commodity having utility need not be useful.

Concept of utilityInitial utility: Utility derived from the first unit of a commodity.Total utility: The aggregate of utilities obtained from the consumption of different units of commodity.Marginal utility: The change that takes place in the total utility by the consumption of an additional unit of a commodity is called marginal utility.MU can be positive, negative or zero.

Relation between Total utility and Marginal utilityQuantityTUMU Description 00-- 188 Initial utility 2146 3184 4202 5200 Zero Utility 618-2 Negative utility

As more and more units of a commodity are consumed, the marginal utility derived from each successive unit goes on diminishing. TU increases upto a limit.MU of the first four units being positive, the TU goes on increasing.MU of fifth unit is zero. TU will be maximum.MU of sixth unit is negative. TU of sixth unit falls from 20 to 18.

MEASURE MENT OF UTILITYIn terms of money- estimates what amount of money a man is willing to pay for a thing.In terms of units utility is measured in utils.

LAW OF DIMINISHING MARGINAL UTILITYAs a consumer consume more and more units of a commodity, total utility would go on increasing but only upto a certain point, beyond which, if one continue to consume any subsequent unit, his total utility will start decreasing.

AssumptionsUtility can be measured in the cardinal number system.MU of money remains constant.MU of every commodity being used is of same quality and size.There is continuous consumption of the commodity.Suitable quantity of the commodity is consumed.No change in income.No change in the price of the commodity and its substitutes.No change in the taste, fashion, habits, etc.

ExceptionsRare thingsMisersManner of consuming things

Importance of the lawBasis of the law of consumption Three lawsLaw of equi marginal utilityLaw of demandConcept of consumer surplusVariety in production and consumption Diminishing utility and increasing variety of goods explain the ever increasing complexity of production and consumption.Difference b/w value-in-use and value-in exchangeValue of diamond is more than that of water although utility of diamond is far less than of water.Price determination determined by its demand and supply.Basis of progressive taxation If persons with more income are taxed at higher rate, then they will have to make the same sacrifice as persons with less income who at taxed at lower rate.Advantage to the consumer MU= Price