Utility Analysis

Introduction:

A consumer demands a good or a service. He demands a good because it gives himutility. Wants – satisfying capacity of a good is called utility.

Meaning of Utility:

The term utility in economics is used to denote that quality in a commodity or service byvirtue of which our wants are satisfied. In other words, want – satisfying power of a goodis called utility.

 Definitions:

• According to Jevons, “Utility refers to abstract quality whereby an object servesour purpose.

• In the words of Hibdon, “Utility is the quality of good to satisfy a want.”

• According to Mrs. Robinson, “Utility is the quality in commodities that makesindividuals wants to buy them”.

 

 law of diminishing marginal utility

 

The law in based on an important fact that although total wants are unlimited, each single want is individually satiable. It means that since each want is satiable, the intensity of want goes on diminishing as the consumer goes on increasing the units of consumption. This law is in also known as ‘Gossen’s First law.’

To put it on Marshal’s Word, “The additional benefit which a person derives from a given increase of his stock of thing diminishes with every increase in the stock that he already has.”

 

Units Total Uitlity Marginal Utility
1 12 12Positive Utility
2 20 8 Positive Utility
3 26 6 Positive Utility
4 30 4 Positive Utility
5 32 2 Positive Utility
6 32 0Zero Utility
7 30 -2 Negative Utility
8 26 -4 Negative Utility

 

law of diminishing marginal utility

The above table shows the total and marginal utilities derived by a consumer on  consumption of a certain good. When the 1st unit is taken, total utility, is 12 units and marginal utility is also 12 units. Further, as he goes on 5th unit, the total utility increases, but at a diminishing rate, i.e. 20, 30, 32……….. but marginal utility falls with every successive unit of consumption i.e. 8,6,4,2 when 6th unit in taken no addition is made to total utility and marginal utility falls to zero.

Further, when units taken are increased to 7th and 8th units, total utility falls and marginal utility turns negative. This means that now at this stage the consumer may also derive dissatisfaction instead of satisfaction. Hence, the consumer would restrict his consumption to 6th unit.

It can be seen from the given figure that the marginal utility curve goes on declining continuously, the law of diminishing marginal utility applies almost to all commodities. However, few exceptions are there as pointed out by some economists.

 

Exception to the Law :

(i) Rare Commodities

(ii) Alcohol

(iii) Music

(iv) Miser Man

(v) Complementary Goods

 

Limitations of the law : The law of diminishing marginal utility is applicable only if the following hold good :-

(i) The different units consumed should be identical in all aspects.

(ii) The law may not apply to articles like gold, cash etc.

(iii) The presence or absence of complementary or substitutes may affect the utility.

(iv) The commodity should be consumed in standard units e.g. if first unit of water is given to a thirsty person by spoon, the second unit should be also given in spoon.

(v) There should be continues consumption i.e. there should be no time gap or interval between the consumption of one unit and the other unit.

 

 

law of equi –marginal  utility

The consumer will distribute his money income between the goods in such a way that the utility derived from the last rupee spent on each good is equal. Means consumer is in equilibrium position when marginal utility of money expenditure on each good is the same. The marginal utility of money expenditure on a good or the utility of the last rupee spent on the good is equal to the marginal utility of the good divided by the price of that good.

Assumption of the Law :

(i) Measurability

(ii) Rationality

(iii) Constancy of marginal utility of money

(iv) Law of Diminishing Marginal Utility goods

(v) No change in taste, preference, income & fashion

(vi) No change in price of substitute & complimentarily goods

(vii) Divisibility of goods

 

 

 

 

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