UTILITY

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UTILITY -Definition

• Human wants are satisfied

with “GOODS". This want
satisfying quality in a good is
called UTILITY.
• Utility means the power to
satisfy a human want
 Utility.
• To find whether good possess utility or
not ask the following question
• Does it satisfy human want?
• If yes, it has utility-otherwise NO
• If you are prepared to pay for it, it is
clear that it will satisfy his want. For
him the commodity will possess utility
• Eg-air, water etc (free goods)
• Food, clothing ( economic goods)
 Utility& Usefulness
Distinguished
• The term “utility” in Economics has no
ethical or moral significance. A thing
may be good or bad, if it satisfies
human want it shall possess utility.
• Opium-injurious to health and
poisonous
• A vulgar picture
• If people are prepared to pay and
satisfy their wants, they possess
utility.
 Utility does not mean
satisfaction
• Satisfaction is what we get
and utility is the quality in the
thing which gives satisfaction.
• Mango gives utility is
incorrect. we should say it
possess utility or it gives
satisfaction. A thing possess
utility but it gives satisfaction
 Utility is subjective
• Blind man cannot see picture.
No utility for him.
• Cigarette – no utility for a non
smoker
• Varies from individual to
individual. It is consumer's
mind which gives its utility
 Different utility at different
time for same commodity

• A warm suit has greater

utility in winter than in
summer
• A rain coat has greater
utility during rain.
 The same product may
possess different utility for
different purposes
• Water has different utilities
when used for drinking,
bathing, washing or
irrigation.
 Form and utility

• A log of wood – less utility

• Table - more utility
Change of ownership and
utility
• When a cultivator buys land
from a non cultivating
owner, utility increases
• When a rich man deposits
his idle money in a bank, it
can be loaned out to some
one in need of it.
 Forms of utility
• (a) FOAM UTILITY
• By changing the of an article,
we can give it greater utility
• ie transforming a log of wood
in to a piece of furniture
 (b) Place of utility
• Utility can be increased by
transporting a good from one
place to another.
• When timber is brought to the
market, it comes to have
much greater utility than it
had in forest
 (c). Time utility
• By storing a commodity
and selling at the time of
scarcity we can give it
greater utility
Utility analysis of demand
• A very important law in consumption
relates to the fact that as we go on
consuming a commodity, the
satisfaction derived from its
successive units go on decreasing.
• As we go on consuming a particular
commodity, each successive units of
the commodity yields him less and less
satisfaction
• In other words, at each step its utility
(marginal utility, not total utility) goes
on decreasing.
• Dr Marshall states the law
thus:-
• “ The additional benefit which
a person derives from a given
increase of his stock of
anything diminishes with
growth of stock he has”
No Margin Total
of al
appl utility
utility
• As the consumer goes on
es eating apples, the
1 15 15 additional or marginal
2 13 28 utility goes on
3 10 38 decreasing. The 7th apple
4 8 46 yields no additional
5 4 50 satisfaction and 8th and
6 2 52
9th have negative utility.
7 0 52 • But total utility goes on
8 -2 50 increasing up to a point,
9 -5 45
but only at a diminishing
rate.
 Diagrammatic
representation
• • OX & OY are 2 axes
Y B • OX represents
U commodity –apples
D
D • OY –represents MU
F • U-U1-Utility curve
M H • AB- utility curve when
U one apple is taken
LL • CD- when 2 apples taken
L but it is less than AB
N
• The additional utilities of
89 X successive apples are
O EF,GH, KL, MN etc
1A 2C 3E 4G 5K 6M 7
• At 7 it is zero-no addition
Units of commodity • After 7, MU is negative
UI
 INITIAL-TOTAL-ZERO-
NEGATIVE UTILITY
• INITIAL UTILITY
• It is the utility of the initial or
the first unit. In the given
table , initial utility is 15
 Total utility
• It gives the total utility at each
step
• If you consume one apple, the
total utility is 15. if you consume
two, the total utility is 28 and so
on
 Zero utility
• When the consumption of a unit of a
commodity makes no addition to the
total utility, then it is the point of zero
utility.
• In our table, the total utility at 6 is 52,
at 7th also 52- at 7th no increase
whatsoever. This is the point of zero
utility. It is thus seen that total utility
is maximum when marginal utility is
Zero
 Negative utility
• If the consumption of a
commodity is carried to
excess, thus instead of giving
any satisfaction, it may cause
dissatisfaction.
• The utility in such a case is
negative. In the table given
above, the marginal utility of
8th and 9th units are negative.
Limitations or Exceptions
• The law of diminishing utility
says that as we go on
consuming more and more
units of a commodity, the
utility falls with every
successive unit consumed.
But this is not true in all
cases. We can see limitations
 (1) DISSIMILAR UNITS
• If the unit is not identical, the
law will not apply.
• For eg, the second apple is
much larger than the first one,
it will yield more satisfaction
than the first. The law will
apply only if units are similar
(2) VERY SMALL UNITS
• If we are thirsty, if water is given by a
small spoon, then each successive
spoonful will give more satisfaction
• If it is in a tumbler, the law starts
working at once
• In the case of small units, MU will
increase instead of decreasing. But if
the consumption is continued, MU must
fall and this is what law states.
 (3) TOO LONG INTERVAL
• Suppose you take morning meal at 10
am and dinner at 8 pm and you eat
nothing in between, the dinner will give
greater satisfaction than your
breakfast.
• If you are taking another meal within
an hour of first, the law applies.
• The law therefore applies only the
units of the commodity are falling
quickly one after the other within a
reasonable period of time.
 (4) RARE COLLECTION

• The law does not apply

in the case of rare
collection
• Rare coins, stamps
(5) ABNORMAL PERSONS
• The law talks about normal
person
• But there are abnormal
persons also. Eg miser
• The more money he has,
the greater is the
satisfaction
 (6) Change in another
person’s stock
• Suppose there are 2 persons
collecting stamps in a town and
both are rivals.
• Suppose that by accident, the
stock of one of them is destroyed.
• Automatically, the value of stock
of other person will go up even
though there has been no change
in his stock
(7) Change in income, habits
and taste
• A change in consumer’s income, a
change in fashion and a change in
other possessions of the
consumer also seem to upset the
law of Diminishing Marginal
Utility. In such cases increase in
consumption may yield greater
and greater satisfaction.
Does the law of Diminishing
Marginal Utility apply to
Money?
• It is said that the law of Diminishing Marginal
Utility could not apply to money.
• More money will be welcomed even if a
person has much of it
• But little thought will show that even money
is no exception to this law. As man grows
rich, he becomes careless in spending money
and wastes it on useless luxuries which do
him no good. The marginal utility decreases.
That is why govt taxes the rich people. The
richer they are, higher taxes. Hence law of
Diminishing Marginal Utility applies to Money
 Marginal utility (Relation between
UNITS OF
MU TU
APPLE
MU & TU)
1
15 15 • MU is the addition made to
total utility by having an
2 13 28 additional unit of the
3 10 38 commodity. The total utility
of 2 apples is 28, of three 38
4 8 46
(15+13+10). Thus MU of third
5 4 50 apple is 38-28=10.
6 2 52 • MU of a commodity is the
loss in unit if one unit is less
7 0 52 consumed. The MU of n units
8 -2 50 is the total unit (TU) of n
9 -5 45 units minus the total utility
of n-1
 Marginal utility and price
• In the previous table, column 2 gives marginal utilities.
Suppose each unit of MU is worth 10 paise. This would
mean that utility of 1ST apple is 15 ten paise.suppose
Apple is sold at 80 paise eah. Then we will stop buying
at 4th because at this point MU and price have been
equated.
• At the 3rd the utility is worth Re 1/= where price is 80
paise. Hence we are tempted to buy the next, ie the 4th
. But no more. at this point the price is 80 paise and
utility is also 80 paise. The two coincides
• If the price of apple were to fall to 20 paise each , we
will buy even the 6th for it where MU and price will be
equal.
• Thus when we pay for a certain price for a commodity,
it can be taken for granted that satisfaction is at least
equal to the price paid.
Importance of law of DMU
• IN TAXATION (progressive taxation is based
on this law)
• IN DETERMINING MARKET PRICE (he can be
induced to buy more if the price is lowered)
• IN SUPPORT OF SOCIALISM ( beyond certain
point wealth is not having any utility for rich
man. If transferred to poor it will have greater
utility)
• IN HOSEHOLD EXPENDITURE (we stop
purchasing at a point when utility of money
spent is equal to to the utility of last unit of
commodity purchased. Spend the rest of the
money on other commodities)
• BASIS ON OTHER ECONOMIC LAWS ( law of
Demand, consumer’s surplus, elasticity of
demand, law of substitution)
 Law of equimarginal utility

• This law of equimarginal

utility is also known as
LAW OF SUBSTITUTION or
LAW OF MAXIMUM
SATISFACTION
 Law of equimarginal utility
• The human wants are unlimited
where as means to buy these
wants are strictly limited.
• It , therefore, becomes necessary
to pick the most urgent wants
that can be satisfied with money.
• He decides to buy the right
quantity by making the best use
of money at his disposal and
derive maximum satisfaction.
 Explanation of law of
equimarginal utility
• To get maximum satisfaction out of
funds we have, we carefully weigh the
satisfaction obtained from each rupee
that we spend.
• When we buy 2 commodities of
different utilities, we ensure that MU of
both are equalized by substituting one
product with other. That is why the law
is also called the law of substitution or
law of equimarginal utility
 Explanation of law of
equimarginal utility
unit MU- MU-
• Suppose we have orange apple
Rs 7/= with us
and want to buy 1 10 8
apples and 2 8 6
oranges
3 6 4
• Let us say that
we spend Rs 3/- 4 4 2
on orange and Rs 5 2 0
4/- on apple and
6 0 -2
the price of both
is Re 1/- each 7 -2 -4
8 -4 -6
Explanation of law of equimarginal
utility unit MU- MU-
• Rs 3/- (orange) orange apple
• Rs 4/- (apple)
• As the MU of 3rd orange
is higher, we should 1 10 8
buy more orange and 2 8 6
less apple.
3 6 4
• Let us substitute one
orange for one apple. 4 4 2
Now MU of both orange 5 2 0
and apple is same ie 4. 6 0 -2
this arrangement gives
max satisfaction. 7 -2 -4
8 -4 -6
 Explanation of law of
equimarginal utility
unit MU- MU-
orange apple
• The total utility of
orange would be
10+8+6+4=28 and 3
1 10 8
apples 8+6+4=18 which
gives a total utility of 2 8 6
46. 3 6 4
4 4 2
• No other combination 5 2 0
can give you a greater 6 0 -2
satisfaction than this 7 -2 -4
8 -4 -6
 DIAGRAMATIC
REPRESENTATION
y
y
APPLE ORANGE

M
M
U L
U

4 P’
4
P E

N’ M’
1 M N 1
o x x
3 4 0 3 4

UNITS OF MONEY UNITS OF MONEY

• In the two figures OX and OY are 2 axis
• X axis – units of money
• Y axis – marginal utility
• The consumer will get max satisfaction if he
spends OM money (Rs3/-) on apples OM’
money (Rs 4/-) on oranges because in this
situation the MU of both are equal.
• PM = P’M’
• Let the purchaser spends spend MN money
(Re1/-) on apples and the same amount of
money less on orange.
• The diagram shows a loss of utility
represented by shaded area asLN’M’P’
and a gain of PMNE utility.
• Loss of utility from reduced
consumption of orange is bigger than
the gain of utility due to the increased
consumption of apple. As MN=M’N’ and
PM =P’M’, it is proved that area LN’M’P’
is bigger than PMNE. Hence the total
utility of new consumption is less.