P.K.

BABY

1

Consumer is assumed to be rational

…..Utility Maximaisation

What is utility?

…..want satisfying power of a commodity

Cardinal utility

…..measurable

Ordinal

…..Not measurable…order of preferences

2

Assumptions:

…..rationality

…..cardinal utility

…..constant MU of money

…..diminishing MU

…..additive

3

This School believes that Utility is Measurable
and is a Quantifiable entity.

Cardinal Approach gives exact measurement
by assigning definite numbers such as 1, 2, 3,
etc.
Assumptions of the Cardinal Marginal Utility
1. Cardinal Measurement of Utility
2. Utilities are Independent
3. Constant Marginal Utility of Money
4. Introspection

Total Utility is the sum total of the units of utility
which an individual derives from the consumption of a
commodity during a specified period of time.

Marginal Utility is the change in the total utility

resulting from a one-unit change in the consumption
of a commodity per unit of time.

It is the addition made to the total utility by the

consumption of the last unit considered just
worthwhile.
MU = Change in Total Utility
Change in Quantity Consumed

Total Utility starts increasing by decreasing
ratio while Marginal Utility starts decreasing.

When Total Utility is at its maximum point and

thereafter starts decreasing, Marginal Utility
comes to zero.

After the maximum point has been achieved

by total utility it starts decreasing which
causes marginal utility to become negative.

The German Economist H. Gossen who was
first to explain the law said that “As the
consumer consumes more and more units of
a commodity, the utility from the successive
units goes on diminishing”.

Marshall explains the law as “The additional
benefit, which a person derives from an
increase of his stock of a thing, diminishes
with every increase in the stock that he
already has”.
Units Total utility Marginal utility
1 10 10
2 15 5 (15-10)
3 19 4 (19-15)
4 22 3 (22-19)
5 23 1 (23-22)
6 23 0 (23-23)
7 21 -2 (21-23)
9
Explanation:

As more and more quantity of a
commodity is consumed, the
intensity if desire decreases and
also the utility derived from the
additional unit.
Assumptions:

All the units of a commodity must be same
in all respects

The unit of the good must be standard

There should be no change in taste during
the process of consumption

There must be continuity in consumption

There should be no change in the price of
the substitute goods

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Mux = Px
This law states that the consumer
maximizing his total utility will allocate
his income among various commodities
in such a way that his marginal utility of
the last rupee spent on each commodity
is equal.
The consumer will spend his money
income on different goods in such a way
that marginal utility of each good is
proportional to its price

Under Law of Equi-marginal utility consumer
equilibrium can be stated in the following
formula.

MUx = MUy = …… Mun = MUm

Px Py Pn

Suppose consumer is buying two Goods X and Y and
marginal utility of them are given as
Units of X & Y MU x MU y
1 33 36
2 30 32
3 27 28
4 24 24
5 21 20
6 18 16

Suppose the prices of good X & Y are Rs. 3 & Rs.4 respectively
and total income is Rs.20. The above table can be
reconstructed by dividing the marginal utilities of good X by Rs.
3 and marginal utilities of good y by Rs. 4.
Units of Money MU x MU y
Px Py
1 11 9
2 10 8
3 9 7
4 8 6
5 7 5
6 6 4
The aim:

to analyze how a rational consumer
chooses between two goods.

For instance, how the change in the
wage rate will affect the choice
between leisure time and work time.

17

Assumptions:

…..rationality

…..utility is ordinal

…..diminishing MRS

…..TU depends on quantities consumed

…..consistency and transitivity

18

An indifference curve is a line that shows all
the possible combinations of two goods
between which a person is indifferent.

In other words, it is a line that shows the
consumption of different combinations of
two goods that will give the same utility
(satisfaction) to the person.

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 Soft
12 A Drinks Comb-
Soft Drinks per unit of time

10 Pizza (X) (Y) ination

8
B
6 1 10 A
4
C
2 2 6 B
D
0
0 2 4 6 8 4 3 C
Pizza per unit of time

7 1 D

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 Y (Work)

For instance, in
Figure a person
would receive Same Utility in two points
the same utility
(satisfaction)
from consuming
5 hours of work 5
and 3 hours of
leisure, as they
would if they 2 IC
consumed 2
hours of work 0
and 6 hours of 3 6 Good X (Leisure)
leisure.

21

The marginal rate of substitution is
the amount of one good (i.e. work)
that has to be given up if the
consumer is to obtain one extra unit
of the other good (leisure).
MRSxy = − ∂Y
∂X

Slope of IC

22

IC slopes downward from left to right
an IC does not touch either x or y axis.

convex to origin
diminishing MRS

a higher IC represents higher level of
satisfaction than lower one

IC can not intersect each other

23
Y (Work)
IC5
IC4
IC3
IC2
IC1
0
Good X (Leisure)

24
y y

IC

IC
x
x

Perfect Substitutes Perfect Complements

25
 Price of Y

Y = px qx + py qy
Y/py

If qx = 0,
px qx + py qy

Spends Y/py on Y

If qy = 0,

Spends Y/px on X
Y/px
Same cost
at different
price combinations 0
Price of X
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Py / Qy

Shifts Parallel
when income changes

Income Rs. 200

Income Rs. 100

o Px / Qx
27
Py / Qy

Px = 5

Px = 15 Px = 10

Px / Qx
28
Py / Qy

Reduction in price of Y

Px / Qx
29
 Py / Qy

Slope of IC,
MRSx,y =
MUx/MUy

Slope of budget
line, Px/Py E
Qy

MRSx,y =
IC3
Px/Py
IC2
IC1

Qx Px / Qx
30

Thank you…………….

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