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MEANING OF UTILITY:
Utility is the basis study of consumer behaviour. In economics the term utility refers to the capacity of a commodity to satisfy human wants.
DEFNITION OF UTILITY:
According to BRIGGS , utility is not only the measurement of satisfaction but also the measurement of intensity of satisfaction.
MEASUREMENT OF UTILITY
Economists have offered their theories Of consumers behaviour on the basis of the measurement of utility. There are two major approaches to measure the utility:
CARDINAL MEASUREMENT UTILITY. ORDINAL MEASUREMENT UTILITY.
Accordingly we have:
The cardinal utility theory of consumer behaviour was given by PROF.MARSHALLIAN to define consumer equilibrium. PROF.MARSHALLIAN defines CARDINAL UTILITY as, consumer could measure the satisfaction derived by the consumption of any goods or services in terms of numbers and units. That unit is known as UTILS.
Marshallian have been explained the cardinal utility theory of consumer behaviour by :
TOTAL UTILITY:
Total utility means the amount of utility derived from the consumption of all units of a commodity which are at the disposal of the consumer.
MARGINAL UTILITY:
Marginal utility means the additional utility resulting from the consumption of an unit of a commodity.
7th glass
28
-2
UTILITY
0 1 2 3 4 5 6 7 F1
-2
UNITS
Law of equi-marginal utility is also known as the LAW OF SUBSTITUTION. Because it is the only law by which the marginal utilities have been equalized through the law of substitution.
10
MRGINAL UTILITY
6 4 2 0 1
F 2 3
B 4
C1 5
I1 X
UNITS
The OX-axis represents the units. The OY-axis represents the marginal utility. The I & I1 represents the marginal utility curve of ice-cream. The C & C1 represents the marginal utility curve of chocolate. Then AB=EF the both utility are equal.
MUx/Px= MUy/Py
According to prof.J.R.HICKS ORDINAL UTILITY means giving rank to the utility derived by the consumption of goods and services.
(a) (b)
1 2
12
8
----4/1 = -4
(c)
(d)
3
4
5
3
-3/1 = -3
-2/1 = -2
INDIFFERENCE MAP
An indifference map is a set of indifferent curves. An indifferences map represents the scale of the preferences of a consumer regarding various combination of the given two goods. In the example given in the next slide shows IC4 curve has highest satisfaction and IC1 curve has the lowest satisfaction.
ASSUMPTIONS
A consumer is interested in buying two products
in combination. He is able to rank his preferences and give a complete ordering of the scale of preferences. Non-satiation, i.e., the consumer always prefers more quantities of goods to lesser quantity. He is rational and his choices are transitive. There is ordinal measurement of utility. so the height of the indifference curve indicates the level of satisfaction without quantification.
to right , i.e., they are negatively sloped. The are convex to the origin. They cannot intersect each other.
Both the approaches follow the proportionality rule. In one it is between price and marginal utility while in the other it is between price and marginal rate of substitution. In Marshallian utility approach the equilibrium condition for a consumer is : MUx/Px=MUy/Py. In J.K.Hicks utility approach the equilibrium condition for a consumer is: MRSxy=Px/Py.