Ektaa Utkarsh Classes Consumer Behaviour Define utility and explain the features of utility Meaning : - In ordinary sense,

the term utility means usefulness. In economics, utility refers to the Want satisfying power of a commodity. For example : - Water has utility because it can satisfy the thirst of a person. Definition : - Utility is the quality in commodities that makes individuals want to buy them, and the fact that individual want to buy commodity shows that they have utility Features of utility 1. Subjective or Psychological concept : - Utility is a psychological concept. It differs from person to person. The utility of a good cannot be same for all individuals. For example (1) Cigarette has much utility to a smoker, rather than that of a Non smoker. (2) Walking stick has much utility to an old man, rather than that of a young man. 2. Relative concept : - Utility of a commodity changes from time to time and place to place. For example (1) Woollen clothes has more utility in Kashmir, than in Mumbai. (2) Umbrella has more utility in rainy season, than in summer. 3. Different from Usefulness : - Utility indicates the power of goods to satisfy human wants, irrespective whether the goods is useful or harmful. Certain goods have utility but they are not useful. For e.g.: -narcotics or drugs like cocaine may have utility for some people who use them to get rid of tension, and stress. But in general, such products are harmful, as it affects the health and wealth of a person. 4. Different from satisfaction : - Utility is not same as that of satisfaction. Utility is not same as the satisfaction. Utility is the power of commodity which a consumer expects before consuming a commodity. But satisfaction is something which he realise after consuming it. 5. Different from pleasure : - A commodity may have utility but need not give pleasure. For ex: Bitter medicine does not give pleasure. Yet it cures the disease. 6. Cannot be measured cardinally : - Utility, being a subjective concept, cannot be measured numerically. But it can only be measured ordinally, i.e. in the order of preference. 7. Utility is intangible : - Utility is intangible in nature. It has no physical existence. One cannot touch it or see it. It can be felt only by the use if the commodity Following are the types of utilities 1. From Utility : - Form utility is created by changing the form or shape of goods. For examples, raw steel can be used to make steel products. The steel products provide form utility. 2. Place utility : - Place utility is created by changing the place of utilization. For instance, goods produced in Mumbai can be transported to Goa for consumption. Thus, transport services can create place utility. 3. Time Utility : -Time utility is created by changing the time of utilization. For instance, certain products can be warehoused from the time of production to the time of consumption. Warehousing services can create time utility. 4. Service utility : - Service utility is created by providing service to people. For instance, teachers can provide service utility to students and doctors to patients, etc. 5. Possession utility : - Possession utility is created by transferring the ownership of goods. For instance, a seller provides possession utility to the buyer, when the seller sells the goods to the buyer. The buyer enjoys possession utility. 6. Knowledge Utility : - It is created by filling the knowledge gap. For instance, advertisements can create knowledge utility by providing information about latest products in the market. 1. EXPLAIN THE LAW OF D.M.U ? AND EXPLAIN ITS ASSUMPTION AND EXCEPTION? Statement of the Law : -The law of diminishing Marginal utility states that (other thing being equal) s the number of units consumed of commodity increases, the marginal utility of that commodity diminishes. In other words, as the consumption of good increases, the marginal utility derived from successive units of a given commodities goes on diminishing. Definition : -In he words of Marshal the Law states that,

The additional benefit which a person derives from a given increase of his stock of a thing, diminishes with every increase in the stock that he already has

The law of diminishing Marginal Utility can be explained with the help of a schedule and a diagram. Units of consumption 1 2 3 4 5 6 7 Total Utility (T.U) 10 18 24 28 30 30 28 Marginal Utility(M.U) 10 8 6 4 2 0 -2

The schedule shows that with every increase in the units of Consumption, the total utility is increasing. It reaches Maximum with the 5th & 6th unit and remains the same, but with 7th unit the total utility decreases from30-28.The Marginal Utility can be derived from total utility. It is observed the Marginal Utility is falling continuously. It reaches zero and then become negative. The Marginal Utility is Zero when total utility is Maximum and Marginal utility is negative when total utility is falling.

In the above diagram X- Axis represents units of consumption and Y-Axis represents Marginal Utility. Various points from the table are plotted on graph. Join those points we can get a curve known as Marginal utility curve. The curve slopes downwards from left to right. It touches X- axis and becomes negative. It is observed from the diagram that at 6th unit of consumption the marginal utility becomes zero, when the total utility becomes maximum. It is the point of Satiety i.e. the want is completely satisfied and its intensity is nil. With the 7th unit of consumption the total utility started falling and the Marginal Utility becomes negative. ASSUMPTION TO THE LAW OF DIMINISHING MARGINAL UTILITY. 1. Cardinal Measurement : It is assumed that utility can be measured in cardinal numbers or numerical terms. Such assumption helps to construct (make) the utility schedule to explain the Law of Diminishing Utility. 2. Continuity in Consumption : All units of the commodity are to be consumed in quick succession. There should not be a gab or interval between consumption of two units.

3. Ceteris Paribus: The Law of DMU assumes that other things are constant. For instance, taste, income, preference, attitudes, habits of the consumer should remain the same. If there is a change in attitude then marginal utility of the commodity may not diminish. 4. Homogeneity : All units of the commodity must be identical in all respects such as quality, shape, size, colour, taste, and so on. If there are differences in the units consumed, the marginal utility may not diminishes. 5.Rationality : It is assumed that consumer behaviour is rational. (Not be mad) the consumer is a normal person who wants to obtain maximum satisfaction. The consumer should not be abnormal such as drug addict, drunkard, miser (kanjus), and so on. 6. Reasonable Units : The units of a commodity consumed should be of reasonable size. The units should neither be too big nor too small. The units must be of standard size. EXCEPTIONS TO THE LAW OF DIMINISHING MARGINAL UTILITY It is believed that the Law of DMU is not applicable in the following cases. But, strictly speaking. The assumption of the law of DMU is not followed in these exceptions. 1. Hobbies : - it is believed that in the case of certain hobbies such as stamp collection, antique (historic) collection, etc. MU goes on increasing with acquisition of additional units. But here the person does not collect the same types of stamps, and therefore, the assumption of homogeneity is not fulfilled. 2. Drunkards/Drug addicts : It is believed that every dose of drug or liquor increases utility to the consumer. But in the case of drunkard or drug addict, there is no rational behaviour is assumed. 3. Miser : - A misers greed increases with the increases in the stock of money. But here miser displays an abnormal behaviour in hoarding wealth. Therefore, the assumption of rational behaviour does not apply. 4. Music and poetry : - It is believed that more poetry and music give greater satisfaction. 5. Reading: - Reading on more books provides more knowledge and in turn, greater satisfaction. But the reader in search of knowledge does not read the same book every now and then. Therefore, the assumption of homogeneity does not apply. 6. Money : - it is assumed that an individual gets more satisfaction with more money and he wants to have more of it. In the case of money, it is to be noted that money alone does not satisfy a want directly. It only acts as purchasing power to purchases goods and services. Goods purchased with money do have diminishing marginal utility. 2. EXPLAIN THE RELATIONSHIP BETWEEN TOTAL UTILITY AND MARGINAL UTILITY Total utility is the sum of all utilities derived by a consumer form all units of commodity consumed by him. Marginal utility is the addition to the total utility derived by consuming an extra or additional unit of a commodity. In other words, marginal utility derived from the consumption of an additional or extra unit of a commodity. The following illustration of a schedule and a diagram explain the relationship between total utility and Marginal utility. Let us assume that an individual consumer Mr. X found of mangoes and start consuming unit of mangoes in quick successive unit of mangoes. Units of consumption 1 2 3 4 5 6 7 DIAGRAM Total Utility (T.U) 10 18 24 28 30 30 28 Marginal Utility(M.U) 10 8 6 4 2 0 -2

With the help of the Schedule and Diagram we derives the following three conclusion 1. Mu goes on diminishing as the consumer consumes more and more units of a commodity and TU increases but, at a diminishing rate. 2. There is an inverse relationship between MU and stock of the commodity i.e. as the stock of the commodity consumed increases, MU goes on diminishing. 3. When MU is Zero, TU is the maximum and it is the point of maximum satisfaction. i.e., point of satiety. 4. When Mu becomes negative, total utility starts diminishing. This is the area of dissatisfaction. MARGINAL UTILITY 1. Meaning: - Marginal utility is the additional utility derived from consuming additional unit of consumption. 2. Formula: -MUn = TUn TUn-1 3. Relationship : *Marginal utility continuously diminishes. *When Marginal utility becomes Zero *When Marginal utility becomes negative. Diagram UTILITY Meaning: Utility is the capacity of a commodity to satisfy human wants. Nature of commodity : A product may have utility irrespective of the commodity is useful or harmful Example : All Commodities have utility such a scars, clothes, consumer durables, and even harmful products like cigarettes, narcotics, (drugs) TOTAL UTILITY Total utility is the sum total of utilities derived from the consumption of all units in a given stock of a commodity TU = MU *Whereas, total utility initially increases but at a diminishing rate *Total utility is the maximum. *Total utility starts diminishing. Diagram USEFULNESS Anything (goods or services) are useful, if they satisfy human want and generate human welfare. A product has useful only when it generate consumer welfare. Harmful products may not generate usefulness. Products such as food items, medicines, clothes, etc., are useful items. Also services such as education, recreation, etc., are useful to people.

Criticism of the law of Diminishing Marginal Utility. 1. Cardinal Measurement : the law assumes that utility can be measured in cardinal numbers . But utility is a subjective phenomena . It is a sense of feeling which cannot be expressed numerically. But it can be measured ordinally i.e. the order of utility whether it is higher or lower can be determined. 2. Unrealistic Assumptions: The law is based on unrealistic assumptions. The homogeneity , continuity, constancy and rationality conditions all together at a time are very difficult to be found in practice.

3. Inapplicability to indivisible Goods : the law cannot be applied to indivisible bulky goods like T.V. refrigerator because normally the consumer would buy only one unit of such good. 4. Marginal Utility of Money : The assumption that the marginal utility remains constant is unrealistic, Actual experience shows that marginal utility of money does diminish. 5. Substitution and Complementary is Ignored : Utility that a person derives from a commodity depends not only on the stock he has but also upon the stock that other have. The law neglects the relationship of substitution and complementary between different commodities. 6. Concept of Utility is Vague : The concept of utility may not be useful to measure the behaviour of the Consumer. People may buy goods not only because of their want satisfying capacity but also because of habit, or to imitate other or to show off . The concept of utility is vague and indefinite. 7. The law considers only one commodity but in actual life our consumption consists of numerous commodities. IMPORTANCE OF THE LAW The law of Diminishing marginal utility has theoretical and practical significance. {A} Theoretical Significance : 1. Consumer Behaviour : The law explains the behaviour of a rational consumer in respect of a single commodity and how he attains equilibrium by equating its price and marginal utility. 2. Universal Truth : The law states that a single want taken at a time is fully satiable and that diminishing marginal utility is universally applicable. 3. Paradox of Value : The law explains the paradox of value by showing the divergence between value-inexchange. 4. Source for Other Economic Laws : The law forms the basis of some important economic concepts and laws such as law of Equi-Marginal utility, law of demand, concept of elasticity of demand, concept of consumers surplus etc. {B} Practical significance 1. Helpful to Producers : the law guides the producer to promote sales by reducing the price. When the price falls, The consumer buys more in order to reduce his marginal utility to that extent. 2. Helpful to consumers : (house expenditure) A consumer will buy a commodity only as long as the marginal utility is equal to the price. The balance of his earnings is used to buy other things. Thus the consumer can plan his expenditure according to the marginal utility he gets and avoid wasteful expenditure. 3. Public finance : The law of diminishing marginal utility has great significance in the field of public finance as it is useful for the finance minister to frame taxation policies. The marginal utility of money is more to the poor and less to rich, So progressive taxes are justified on the ground that the ability of the rich to pay taxes is much higher than that, of the poor. 4. Welfare Policy : On the basis of this law, the government can tax the rich heavily and transfer the money to the poor in the form of social expenditure like unemployment benefits, free education, medical aid etc. This will lead to equitable distribution of wealth and the economic welfare of the poor will increase. The law is useful to the socialists to promote redistribution of wealth, social justice and social welfare. 5. Determination of Prices and levels of Demand and Supply : Higher the estimate of marginal utility, greater the demand and higher will be the price the consumer is ready to pay and vice versa. When supply increases marginal utility falls. So the seller will have to reduce the price if they want to sell more. Thus the concept of marginal utility is important in determining the prices of commodities. 6. Price Discrimination : The law useful to the monopolist in practicing price discrimination. To maximise his profits, a monopolist may charge a higher price from the rich and lower price from the poor for the marginal utility of money is less to rich and more to the poor.

Marginal utility and Money :

Money is one such thing. Where the more one has, the more he wants. But even in the case of money marginal utility diminishes. E.g. suppose A gets a daily income of Rs. 100/- and B gets Rs. 10/- Suppose the employer decides to give Rs 2/- to both. A is not bothered much, but B welcomes it. Similarly , if both are asked to part with Rs 2/- A gives readily, but B is reluctant. This shows that more and more of money one has the less is the marginal utility of additional unit of money. Thus the law is applicable to money too for the Marginal utility of money is more to a poor man than to a rich man. Progressive tax system is based on the theory of diminishing marginal utility The utility of money goes on increasing because :1. Money is not one commodity. It is a claim on all commodities, since money is used to represent commodities, the homogeneity condition is not satisfied. 2. With less money one satisfies necessaries first and then turns to comforts and luxuries, when the stock of money is larger, the utility from additional unit goes on diminishing. 3. Wants are unlimited. Since money represents endless commodities. Its want can never be fully satisfied. So marginal utility of money can never be zero or negative. TU of money is always positive. Paradox of Value : The relationship between marginal utility and price helps to explain the paradox of value . Commodities like air and water have high utility but they command no price because they are available in abundance and have negligible marginal utility. In case of goods like diamonds the total utility is not high, but they command a high price because they are scarce and their marginal utility is high. Thus goods which have high value in use may have very little value in exchange and vice versa.