The want satisfying capacity of a product is called utility.

# The want satisfying capacity of a product is called utility.

## The want satisfying capacity of a product is called utility.

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##### Presentation Transcript

1. The want satisfying capacity of a product is called utility. Types of utility Cardinal utility analysis Ordinal utility analysis

2. Features of utility: • Utility is subjective • Utility is relative • Utility is not essentially useful • Utility is independent of morality

3. Utility concepts • Initial utility • Total utility TU=f(Qx) • Marginal utility MU=Tn-(Tn-1)

4. Types of marginal utility • Positive marginal utility • Zero marginal utility • Negative marginal utility

5. Total & marginal utility

6. Important concepts: • Paradox of value • Law of diminishing marginal utility (LDMU) • Consumer’s equlibrium

7. Law of diminishing marginal utility (LDMU) Assumptions • Utility can be measured in cardinal system • Marginal utility of money remains constant • MU of every commodity is independent. • Every unit of commodity is of same size & type. • Consumption is continuous. • No change in income • No change in taste , preference

8. Law of diminishing marginal utility (LDMU)

9. Exceptions • Rare things • Misers • Deficiency of the product • Habitual consumption (addiction)

10. Indifference curve “an indifference curve is a locus of all such points which show different combinations which yield equal satisfaction to the consumer”

11. Indifference curve analysis Assumptions • Customer is rational • Consumer seeks maximum satisfaction • Consumer is capable of ordering all possible combinations Marginal rate of substitution

12. Properties of indifference curves • It slopes downwards • A higher level of indifference curve shows higher level of satisfaction • IDC never touches the axis • IDC’s need not be parallel to each other • Two IDC’s never cut each other Types Straight line IDC Right angled IDC

13. Price line or budget line “ the price line shows the combinations of the goods that can be purchased if the entire income is spent” -Ferguson

14. Consumer’s equilibrium (IDC analysis) Income effect Price effect

15. Similarities between IDC and utility analysis • Both are subjective • Both assume customer is rational • Condition of diminishing M.U.

16. Superiority of IDC • More realistic • Free from the effect of independent commodity • Free from the assumption of utility of money being constant • Explains income and budgetary effects