8/14/2019 Utility Analysis1
1/22
Utility is the power or capacity of a
commodity to satisfy human wants.As long as a commodity has some use i.e. ,it has the capacity to satisfy a person ithas the UTILIY.
8/14/2019 Utility Analysis1
2/22
1. Utility is subjective(deals with mental
satisfaction)2. Utility is Relative(does not remain
constant)
3. Not essentially useful.
8/14/2019 Utility Analysis1
3/22
1. Total Utility- TU refers to the entireamount of satisfaction obtained from
consuming various quantities of acommodity.
TUx = F(Qs)
8/14/2019 Utility Analysis1
4/22
2. Marginal Utility MU is the increase in TUwhich results from a unit increase inconsumption.
MU = TU-----
Q
8/14/2019 Utility Analysis1
5/22
5
Q ($) TU ($) MU
0 0
1 40 40
2 85 45
3 120 35
4 140 20
5 150 10
6 157 7
7 160 3
8 160 09 155 -5
10 145 -10
145
8/14/2019 Utility Analysis1
6/22
6
Total Utility
0
50
100
150
200
1 2 3 4 5 6 7 8 9 10 11
($) MU
-20
-10
0
10
20
30
40
50
1 2 3 4 5 6 7 8 9 1 11
Q ($) TU ($) MU
0 0
1 40 40
2 85 453 120 35
4 140 20
5 150 10
6 157 7
7 160 3
8 160 0
9 155 -5
10 145 -10
145
8/14/2019 Utility Analysis1
7/22
IC analysis refers to the locus of pointsrepresenting the various combinations oftwo goods which yields the same level ofsatisfaction to the consumer.
8/14/2019 Utility Analysis1
8/22
1 Rationality- (maximum satisfaction)
2Ordinal Utility-(consumer can rank his
preferences)
3Diminishing marginal rate ofsubstitution(the rate at which certain
amount of one commodity is substituted foranother is called MRS)
8/14/2019 Utility Analysis1
9/22
4. Axioms of comparison-Any 2combinations of X & Y commodities can becompared in preference by an individual-
A) A is preferred to B.B) B is preferred to A.
C) A&B are indifferent
8/14/2019 Utility Analysis1
10/22
5.Consistency
6. Transitivity- Assumes there are three
combinations of goods A,B,C. If A ispreferred to B and B is preferred to C ,thenA must be preferred to C .
7. Scale of preference independent ofmarket price.
8/14/2019 Utility Analysis1
11/22
COMBINATION GOOD X GOOD Y
A 2 18
B 4 13
C 6 9
D 8 6
8/14/2019 Utility Analysis1
12/22
8/14/2019 Utility Analysis1
13/22
Higher indifference curves represent larger
quantities of goods than lowerindifference curves.
8/14/2019 Utility Analysis1
14/22
A consumer is willing to give up one good
only if he or she gets more of the other
good in order to remain equally happy.
If the quantity of one good is reduced, thequantity of the other good must increase.
For this reason, most indifference curves
slope downward.
8/14/2019 Utility Analysis1
15/22
8/14/2019 Utility Analysis1
16/22
8/14/2019 Utility Analysis1
17/22
QY
QX
QY
QX
PerfectComplements
PerfectSubstitutes
8/14/2019 Utility Analysis1
18/22
PRICE LINE OR BUDGET LINE-
It shows all the different combinations of thetwo commodities that a consumer canpurchase ,given his money income and theprice of the two commodities.
8/14/2019 Utility Analysis1
19/22
It is a straight line. It has a negative slope. Its slope indicates ratio of prices of two
goods.
8/14/2019 Utility Analysis1
20/22
20
8/14/2019 Utility Analysis1
21/22
Combination of goods that maximizes utilityfor a given set of prices and a given level ofincome
Represented graphically by the point oftangency between an indifference curveand the budget line
MUX/MUY = PX/PY
MUX/PX = MUY/PY
8/14/2019 Utility Analysis1
22/22
Top Related