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Consumer Behavior : Utility
Analysis
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Utility
Utility refers to want satisfying powerof a commodity.
In objective terms, utility may be
defined as the amount of satisfactionderived from a commodity or serviceat a particulartime.
Assumptions: Utility can be measured. Marginal Utility of money remains constant
No change in income of the consumer, his taste & fashion to beconstant
No substitute
Independent marginal utility of each unit of commodity
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Total Utility (TU) and Marginal Utility
(MU)
Total Utility refers to the total satisfaction derivedby the consumer from the consumption of agiven quantity of a good.
TU = Sum of all MU
MU refers theadditional satisfaction from one moreunit of consumption
The exponents of the utility analysis have developed two lawswhich occupy a very important place in economics theory andthey are :-
# Law of Diminishing Marginal Utility
# Law of Equi-Marginal Utility
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Cardinal utility believes that utility
could be measured & added (utility
unit & marginal analysis);
Ordinal utility holds that utility
could only be ordered and cannot be
measured (indifference curve).
Cardinal Utility& Ordinal Utility
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Law of Diminishing Marginal Utility
Though wants of an individual are unlimited in number yeteach individual want is satiable. Because of this, the morewe have a commodity, the less we want to have more of it.
This law state that as the amount consumed of a commodityincreases, the utility derived by the consumer from theadditional units, i.e marginal utility goes on decreasing.
According to Marshall, The additional benefit a personderives from a given increase of his stock of a thing
diminishes with every increase in the stock that he alreadyhas
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Law of Diminishing Marginal Utility
Explanation: As more and more quantity of a commodity is
consumed, the intensity of desire decreases and alsothe utility derived from the additional unit.
Assumptions:
All the units of a commodity must be same in allrespects
The unit of the good must be standard
There should be no change in taste during the processof consumption
There must be continuity in consumption
There should be no change in the price of thesubstitute goods
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Units of a goods
consumed
Marginal
Utility (MU)
Total
utility (TU)
1 6 6
2 4 10
3 2 12
4 0 12
5 -2 10
6 -4 6
Relationship between MU and TU
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Law of Equi-Marginal Utility
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 lastrupee spent on each commodity is equal.
Or
The consumer will spend his money income
on different goods in such a way thatmarginal utility of each good is proportional
to its price
MU of A / P of A = MU of B / P of B
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Limitations of Law of Equi-Marginal
Utility
# It is difficult for the consumer to know the
marginal utilities from different commodities
because utility cannot be measured.
# Consumer are ignorant and therefore are
not in a position to arrive at an equilibrium.
# It does not apply to indivisible andinexpensive commodity.
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Rupee
Marginal Utility of
Apples
Marginal Utility
of Oranges
1 10 7
2 8 6
3 6 5
4 4 4
5 2 3
Equi Marginal Utility
Total Money available is Rs.5 to be spent on
Apples and Oranges. Price of both comodities
is Re.1 per unit.
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A locus of points representing different bundles
of goods and services, each of which yields
the same level of total utility.
Indifference curve
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0
2
4
6
8
10
12
14
16
18
20
22
24
26
28
30
0 2 4 6 8 10 12 14 16 18 20 22
a
Pe
ars
Oranges
Pears
3024
20
14
10
8
6
Oranges
67
8
10
13
15
20
Point
ab
c
d
e
f
g
Constructing an indifference curve
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0
10
20
30
0 10 20
Deriving the marginal rate of substitution
(MRS)a
b
Unitso
fgoodY
Units of good X
26
6 7
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0
10
20
30
0 10 20
a
b
Unitso
fgoodY
Units of good X
26
6 7
DY= 4
DX= 1
MRS= 4
Deriving the marginal rate of substitution
(MRS)
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0
10
20
30
0 10 20
a
b
Unitso
fgoodY
Units of good X
26
6 7
cd
DY= 4
DX= 1
DY =1
DX= 1
MRS= 1
MRS= 4
13 14
9
Deriving the marginal rate of substitution
(MRS)
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0
10
20
30
0 10 20
Unitso
fgoodY
Units of good X
I1I2
I3
I4
I5
An indifference map
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Unitso
fgoodY
Units of good X
a
b
Units of
good X
0
5
10
15
Units of
good Y
30
20
10
0
Point on
budget line
a
b
Assumptions
PX=2
PY= 1
Budget = 30
0
10
20
30
0 5 10 15 20
A budget line
ff f i i i h
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0
10
20
30
40
0 5 10 15 20
Unitso
fgoodY
Units of good X
Assumptions
PX=2PY= 1
Budget = 40
16
7
m
n
Budget
= 40
Budget
= 30
Effect of an increase in income on the
budget line
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0
10
20
30
0 5 10 15 20 25 30
Effect on the budget line of a fall in the price
of good X
Unitso
fgoodY
Units of good X
Assumptions
PX=1PY= 1
Budget = 30
B1 B2
a
b c
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I1I2
I3
I4
I5
Unitsof
goodY
O
Units of good X
Budget line
Finding the optimum consumption
S l f i diff d
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I1I2
I3
I4
I5
Unitsof
goodY
O
Units of good X
r
s
tY1
X1
v
u
Same slope at tof indifference curve and
budget line
Eff i f h i i
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Unitsof
goodY
O
Units of good X
B1
Effect on consumption of a change in income
I1
Eff t ti f h i i
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I2
Unitsof
goodY
O
Units of good X
B1 B2 I1
Effect on consumption of a change in income
Eff t ti f h i i
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I2
Unitsof
goodY
O
Units of good X
B1 B2 B3 B4 I1
I3
I4
Effect on consumption of a change in income
Eff t ti f h i i
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I2
Unitsof
goodY
O
Units of good X
B1 B2 B3 B4 I1
I3
I4
Incomeconsumption curve
Effect on consumption of a change in income
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0
10
20
30
0 5 10 15 20 25 30
Effect of a fall in the price of goodX
Unitso
fgoodY
Units of good X
Assumptions
PX=2PY= 1
Budget = 30
B1 I1
j
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0
10
20
30
0 5 10 15 20 25 30
Unitso
fgoodY
Units of good X
Assumptions
PX=1PY= 1
Budget = 30
B1 I1
j
I2
B2
k
Effect of a fall in the price of goodXa
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0
10
20
30
0 5 10 15 20 25 30
Unitso
fgoodY
U i f d X
B1 I1
j
I2
B2
k
Priceconsumption curve
Effect of a fall in the price of goodXa
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