economics slides 4

8/9/2019 Economics Slides 4

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Marginal Utility Marginal Utility

´Marginal utility is the change in total utility due´Marginal utility is the change in total utility due

to change in consumption unitsµto change in consumption unitsµ

MU=MU= ̈TU ̈TU //¨X ¨X

OrOr

́The utility of the next (extra, last or further) ́The utility of the next (extra, last or further)

unit of consumption is called marginal utility ́unit of consumption is called marginal utility ́



Total Utility ( TU) Total Utility ( TU)

́The sum of utility derived by all consuming ́The sum of utility derived by all consuming

units is called total utilityµunits is called total utilityµ



Law of Diminishing Marginal UtilityLaw of Diminishing Marginal Utility

´if other factors remain constant then by ´if other factors remain constant then by

consuming more and more units of aconsuming more and more units of a

commodity, the utility derived from eachcommodity, the utility derived from eachsuccessive unit will be diminished (decreased)µsuccessive unit will be diminished (decreased)µ



Limitations of the Law Limitations of the Law

Addicted consumer has more and more utility Addicted consumer has more and more utility

Human beings are greedier to get additionalHuman beings are greedier to get additional

money money No limit to collect more precious andNo limit to collect more precious and

commodities like diamondcommodities like diamond

Marginal utility for rich and poor people are

Marginal utility for rich and poor people aredifferentdifferent



Measurement of utility Measurement of utility

Cardinal ApproachCardinal Approach

Ordinal ApproachOrdinal Approach

Cardinal Theor y (Cardinal Theor y (Dr. Marshall)Dr. Marshall) ´Utility is measurable in terms of specific numbers´Utility is measurable in terms of specific numbers

calledcalled utils utils µµ

Utils:Utils:

An imaginary unit of satisfaction from the consumption An imaginary unit of satisfaction from the consumption

of a goodof a good



Consumer SurplusConsumer Surplus

The excess of what a person would have been The excess of what a person would have beenprepared to pay for a good (i.e. utility) over whatprepared to pay for a good (i.e. utility) over whatthat person actually paysthat person actually pays

Marginal Consumer SurplusMarginal Consumer Surplus

The difference b/ w what you are willing to mpay for The difference b/ w what you are willing to mpay forone more unit of a good and what you are actually one more unit of a good and what you are actually chargedcharged

MCS=MUMCS=MU--PP

graphgraph



Equilibrium of ConsumerEquilibrium of Consumer

MU>PMU>P

MU<PMU<P

MU=PMU=P

MUMU A A/P/P A A = MU= MUBB/P/PBB = MU= MUCC / Pc = ««../ Pc = ««..



Law of EquiLaw of Equi-- Marginal Utility Marginal Utility

A consumer should spend his budget on A consumer should spend his budget on

different commodities in such a way thatdifferent commodities in such a way that

marginal utilities of all consuming goods shouldmarginal utilities of all consuming goods shouldbe equal to each otherbe equal to each other

MUMUX X = MU= MU Y Y = MU= MUZZ = «««.= «««.



Money UnitsMoney Units MUMUX X MUMU Y Y

11 1616 2020

22 1212 1616

33 88 1212

44 44 88

55 00 44

If Px=2 and Py =1

MUx/Px=MUy /Py



Limitations of the law Limitations of the law

Utility is quality and so its quantitativeUtility is quality and so its quantitative

measurement is not possible.measurement is not possible.

Personal requirements or needs of fashionPersonal requirements or needs of fashion IgnoranceIgnorance

IndivisibleIndivisible



Derivation of Demand Curve (underDerivation of Demand Curve (under

utility approach)utility approach) An individual·s Demand curve An individual·s Demand curve

PPX X = MU= MUX X

The market demand curve The market demand curve The horizontal sum of all individual·s demand curves The horizontal sum of all individual·s demand curves

and hence MU curvesand hence MU curves

economics slides 4

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