utility analysis ppt

1. Presented By:
Ankush Sharma
Suman Pahuja
Nirbhay Singh
Presented To:
Dr. Prerna Sharma

2.  The term utility in economics is used to
denote that quality in a commodity or
service by virtue of which our wants are
satisfied. In other words, want –
satisfying power of a good is called
utility.
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3. Cardinal Utility Vs Ordinal Utility
 Cardinal
 Assigning
numerical values to
the amount of
satisfaction
 Ordinal
 Not assigning
numerical values to
the amount of
satisfaction but
indicating the order
of preferences, that
is, what is preferred
to what
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Subjective
Relative
Not Essentially Useful
Independent of Morality

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 Initial Utility
 It is obtained from the consumption of the first
unit of a commodity
 Total Utility
 Tux = f (Qx)
 Marginal Utility
 MUnth = Tn – Tn-1 or MU = change TU/
change Q

6. Quantity Total
Utility
Marginal
Utility
Description
0 0 - Initial Utility
1 8 8 – 0 = 8
2 14 14 – 8 = 6 Positive Utility
3 18 18 – 14 = 4
4 20 20 – 18 = 2
5 20 20 – 20 = 0 Zero Utility
6 18 18 – 20 = -2 Negative
Utility
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7. 7
X
Marginal
Utility
Total
Utility
X1 X2
X1 X2 X
TU
MU
X1 is where marginal utility reaches its
maximum.
This is where we encounter
diminishing marginal utility.
The slope of TU has reached its
maximum; TU has an inflection point
here.
X2 is where total utility reaches its
maximum.
MU is zero.
This is the saturation point or
satiation point.
After that point, TU falls and MU
is negative.
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8. 8
Law of Diminishing Marginal Utility
Law of Equi-Marginal Utility
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9. 9
This law can be stated as the fall in marginal utility of any
good due to successive consumption of that good.
For ex:- Suppose a person starts eating toast, the first
toast gives him great pleasure. By the time he taking
second he yield less satisfaction ;the satisfaction of third is
less than that of second and so on. the additional
satisfaction goes on decreasing with every successive toast
till it drops down to zero; and if the consumer forced to take
more the satisfaction may become zero.
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10. 10
-20
-15
-10
-5
0
5
10
15
20
1 2 3 4 5 6 7 8
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11. 11
Law of equi – marginal utility is the second
important law of utility analysis.
It states that in order to get maximum
satisfaction, consumer should spend his
limited income on different commodities in
such a way that the last rupee spent on each
commodity yield him equal marginal utility.
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12. 12
No. of Ice Cream
Cups
Marginal
Utility
First 4
Second 3
Third 2
Fourth 1
Fifth 0
Sixth -1
Table Shows:
The table shows that first cup of
ice cream yields 4utils of marginal
utility.
The second cup of ice cream will
yield less marginal utility than the
first one i.e. 3utils.
Third cup will yield still less MU,
say 2utils.
Fourth cup will yield just 1utils of
MU. At this stage want may be fully
satisfied.
Thus fifth cup will yield zero MU. If
you are forced to take sixth cup of
ice cream it may upset system and
yields negative utility say, -1 util.
1 2 3 4 5 6
4
3
2
1
0
In the Figure:
OX axis – Ice Cream(Quantity)
OY axis – Marginal Utility(MU)
AB is Marginal Utility Curve (MUC)
It slopes downward from left to right (negative slope)
indicating first cup of ice cream 4 utils, second 3 utils,
third 2 utils and fourth 1util of marginal utility. Fifth cup
of ice – cream yields zero marginal utility.
AB curve touches OX – axis at point C that represents
fifth cup of ice cream.
sixth cup of ice cream yields negative marginal utility
and so AB curve goes below OX – axis.
A
B
-1
X
Y
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13. 13
Utility can be measured in the Cardinal number system.
Marginal Utility of money remains constant.
Marginal Utility of every commodity is independent.
Every unit of the commodity being used is of same
quality and size.
There is a continuous consumption of commodity
Suitable quantity of a commodity is consumed.
There is no change in the income of consumer.
There is no change in the price of commodity and its
substitutes.
There is no change in the tastes, character, fashion,
and habits of consumer.
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14. 14
Utility is subjective
Cardinal measurement of Utility is not possible
Every commodity is not an independent commodity
Marginal utility cannot be estimated in all conditions
Marginal utility of money does not remain constant
Too many assumptions
consumer is regarded as computer
It does not explain giffen’s paradox
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It was first introduced by
Marshall.
Consumer surplus measures the
difference between what a person
is prepared to pay for a commodity
and the amount that he actually is
required to pay.

16. Example:
 Let us suppose that a cutomer is willing to pay a price of p2 for a q2
quantity of goods and likewise for q 1a price of p1, but in actual the
market price of that good is p0 and he can purchase q0 quantity of
that good on demand curve DD’. Therefore that area between A&C
represents the consumer ‘s surplus.
D
D’
Consumer’s SurplusA
C
qq0q1O
p1
p0
Price
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q2
r1r2
B
p2

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