Steam Expo - Economics

STEAM EXPO -ECONOMICS
-Abdurrahman Zaki
TOPIC-UTILITY
WHAT IS UTILITY?
Definition – It is a measure of satisfaction an individual gets from the
consumption of the commodities. In other words, it is a measurement of
usefulness that a consumer obtains from any good. A utility is a measure of
how much one enjoys a movie, favorite food, or other goods. It varies with
the amount of desire.
1. A Utility of a good differs from one consumer to another.
2. It keeps on changing for the same consumer due to change in the amount
of desires.
CHARACTERISTICS OF
UTILITY
1) It is dependent upon human wants.
2) It is immeasurable.
3) Utility depends upon use.
4) It is subjective.
5) Utility cannot be Measured Objectively.
MEASUREMENT OF UTILITY
Measurement of a utility helps in analyzing the demand behaviour of a customer. It
is measured in two ways:
A. Cardinal Approach
B. Ordinal Approach/Indifference curve approach
CARDINAL MEASUREMENT OF
UTILITY
It is that concept of utility which assumes that utility can be measured in numbers like
1,2,4,5,etc. In other words, utility is measurable in standard numerical units, known
as‘utils’.It was proposed by Professor.Marshall.
ORDINAL MEASUREMENT OF
UTILITY
According to this utility cannot be measured in numerical units, a consumer can at
best rank his preferences in the sets of most preferred to least preferred sets. It was
proposed by Professor. JR. Hicks.
DIFFERENCE BETWEEN CARDINAL
AND ORDINAL UTILITY
MEASURES OF UTILITY
A. Total Utility: Total utility of a fixed quantity of a commodity(TU)is the total
satisfaction derived from consuming the given amount of some commodity
x.More of commodity x provides satisfaction to the consumer.TU depends on the
quantity of the commodity consumed, therefore(TUn)refers to total utility derived
from consuming n units of a commodity x.It is calculated as TUn = MU1 + MU2
+ .....+ MUn
B. Marginal Utility: Marginal Utility(MU)is the change in total utility due to
consumption of one additional unit of a commodity. It is calculated as MUn = TUn
– TUn – 1
VALUES OF MARGINAL AND TOTAL UTILITY DERIVED
FROM CONSUMPTION OF VARIOUS AMOUNTS OF A
COMMODITY

GRAPH EXPLANATION
As the consumer has more of the good, the TU increases less than in proportion and
the MU gradually declines but is positive.
When TU is maximum, called saturation point, MU is zero.
When TU falls, MU becomes negative.
LAW OF DIMINISHING
MARGINAL UTILITY
Law of diminishing marginal utility states that as a consumer consumes more and
more units of a commodity, marginal utility derived from each successive unit goes
on diminishing.
A stage comes when marginal utility becomes zero. At this point total utility
becomes maximum. If the consumer consumes beyond this stage, marginal utility
becomes negative and total utility falls.
ASSUMPTIONS OF THE LAW
Standard unit of measurement is used: If the unit of measurement is very large or
very small then the law will not hold. Examples of inappropriate units are: rice
measured in grams, water in kgs etc.
Homogeneous commodity: All units of the commodity consumed are homogeneous
and perfect substitutes.
Continuous consumption: The law holds only when consumption of successive
units of a commodity is without a time gap.
Mental and social condition of the consumer must be normal: The law will hold
when consumer’s mental condition is normal. His income and tastes are unchanged
and his behaviour is rational.
LAW OF DEMAND
The law of demand states that other factors being constant price and quantity
demand of any good and service are inversely related to each other.
MARGINAL RATE OF
SUBSTITUTION(MRS)
The marginal rate of substitution (MRS) is the amount of a good that a consumer is
willing to consume compared to another good as long as the new good is equally
satisfying.
LAW OF DIMINISHING
MARGINAL RATE OF
SUBSTITUTION
The law of diminishing marginal utility states that , as consumption increases, the
marginal utility derived from each additional unit declines.
MONOTONIC PREFERENCES
 Monotonic preferences means the consumer preferences are such that greater consumption
of a commodity always offers him a higher level of satisfaction.
INDIFFERENCE CURVE
An indifference curve is a chart showing various
combinations of two goods or commodities that leave the
consumer equally well off or equally satisfied—hence
indifferent—when it comes to having any combination
between the two items that is shown along the curve.
FEATURES OF INDIFFERENCE
CURVE
1. Indifference curve slopes downwards from left to right: If a consumer decides
to have one more unit of a commodity(say mangoes), quantity of another good
(say oranges) must fall so that the total satisfaction (utility) remains same.
2. HIGHER INDIFFERENCE CURVE REPRESENTSHIGHER LEVEL OF
SATISFACTION: AS long as Marginal Utility of a commodity is positive, an
individual will always prefer more of that commodity, as more of the commodity
will increase the level of satisfaction.
3. Two Curves cannot touch or Intersect each other: Two indifference curves do
not intersect each other since each indifference curve represents a different level
of satisfaction, indifference curves can never intersect at any point.

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