■ STD.

XII ECONOMICS
CHAPTER 2 : UTILITY ANALYSIS

TOPPER NOTES — 100/100

■ BOARD EXAM YEARS TOPIC

Mar '20 Features of Utility

Feb '26, Mar '24, '22 Types/Forms of Utility

Mar '25, Aug '24, Mar '20 Law of DMU – State & Explain

July '22 Exceptions of DMU

Mar '23 Criticisms/Limitations of DMU

July '23 Concepts of Utility (TU & MU)

1. MEANING OF UTILITY

• Utility = Want-satisfying power of a commodity. It is the capacity of a good to satisfy human wants.

• Concept introduced by Dr. Alfred Marshall in his book Principles of Economics (1890).

• He introduced the idea that utility can be measured in a unit called UTIL → basis of Cardinal Utility Approach.

• Utility is NOT the same as usefulness. A gun has utility but may not be useful morally.

• Utility is NOT the same as pleasure/satisfaction. Utility is the capacity; satisfaction is the end-result.

■ EXAM TIP: Alfred Marshall, 1890, UTIL, Cardinal Utility — always write all 4 in introductions.

2. FEATURES OF UTILITY (Mar '20)

1. RELATIVE Utility changes with time and place.

CONCEPT

E.g.: • Aqua guard (water purifier) → more utility in rainy season (risk of water-borne diseases).
• Room freshener → more utility in bathroom than drawing room.

2. SUBJECTIVE Utility differs from person to person due to tastes, preferences, habits, age, occupation,
surroundings.
CONCEPT

E.g.: • Measuring tape → more utility to tailor than cobbler.

• Fish curry → more utility to non-vegetarian; zero/no utility to vegetarian.

3. ETHICALLY Utility does NOT consider moral/ethical factors. It just measures want-satisfying power.

NEUTRAL

E.g.: • A gun has utility for a terrorist as well as a soldier.

• Colourless shoes can have utility even if ethically undesirable.
4. UTILITY ≠ Utility need not be useful. A commodity harms health but still has utility.

USEFULNESS

E.g.: • Alcohol has utility (satisfies want) but is not useful to health.
• Milk has utility as well as usefulness.

5. UTILITY ≠ Utility = capacity to satisfy; Satisfaction = end-result of consumption. Utility and pleasure are
inter-related but different.
SATISFACTION /
PLEASURE

E.g.: • A textbook has utility for a student but may not give pleasure.
• Satisfaction is actually realised after consumption.

6. UTILITY IS Utility is intangible and invisible. It cannot be experienced and is measured cardinally in
numbers.
HYPOTHETICAL

E.g.: • 'Good Day' biscuit has 5 utility, 'Marie' biscuit has 5 utility — cannot say which is better.

7. UTILITY IS A commodity can satisfy more than one person or serve many purposes.

MULTI-PURPOSE

E.g.: • Electricity and water can be used for many purposes at the same point of time.

8. UTILITY DEPENDS Greater the intensity/urgency of want, greater the utility of the commodity.

ON INTENSITY OF
WANT

E.g.: • Utility of fan is high when weather is warm.

• Utility of notes is higher when exams are closer.

9. UTILITY IS THE A person will demand a commodity only if it has utility for him.

BASIS OF DEMAND

E.g.: • An uneducated person will not demand a calculator (no utility for him).
• A student pursuing Arts will not demand a Commerce book.

10. MEASUREMENT Utility can only be measured cardinally (in numbers). It is an abstract concept.

OF UTILITY IS
HYPOTHETICAL

E.g.: • Cannot say that 'Mango' biscuit has 5 utility unless compared to another.

■ REMEMBER: Features = 10 points. Board loves 4-point questions — pick any 4 and write definition + example
each.
 3. TYPES / FORMS OF UTILITY (Feb '26, Mar '24, '22)

TYPE MEANING EXAMPLE

1. Form Utility Created by changing the shape/form/structure of an existing Wood → Furniture; Cotton → Cloth; Sugarcane
material during manufacturing/processing. → Sugar

2. Place Utility Created when goods are transferred from place of production Mangoes transferred from mango farms to
to place of consumption. Utility increases with change in various mobile stores across the country.
place.

3. Time Utility Utility increases with change in time of utilisation. Created by • Umbrellas → more utility in rainy season. •
storing goods and making available at right time. Warehousing crackers → more utility during
Diwali.

4. Service Utility Utility arises when personal services are provided by a Professor giving lectures; Advocate giving legal
person/group to others. advice to clients.

5. Knowledge Utility Utility increases when user/buyer acquires knowledge about Utility of a washing machine increases when
a product (through ads, demos, manuals etc.) user knows how to operate it.

6. Possession Utility Utility created when legal ownership is transferred from one Cakes in 'Ribbons and Balloons' shop → utility
person to another. Utility will increase when one places an when ownership transferred from seller to buyer.
order, pays price and takes possession.

■ EXAM TIP: Board Q says 'any four types' — write all 6 briefly, you'll be safe. Always give one example each.

4. CONCEPTS OF UTILITY — TU & MU (July '23)

A) TOTAL UTILITY (TU)

• TU = Aggregate/sum of all utilities derived from consuming ALL units of a commodity.

• Symbolically: TUn = MU1 + MU2 + MU3 + ... + MUn

• E.g.: A person consumes 5 Dairy Milk chocolates. TU = sum of marginal utilities of each chocolate consumed.

• TU derived from all units = sum total of all successive (back-to-back) utilities derived.

B) MARGINAL UTILITY (MU)

• MU = Additional utility derived by consuming one extra (additional) unit of a commodity.

• It is the utility derived from the last unit consumed.

• Symbolically: MUn = TUn – TUn-1

• E.g.: Consumer has consumed 2 Dairy Milk chocolates. MU of 3rd chocolate = additional utility when he consumes the
3rd one.

UTILITY SCHEDULE (Chocolates Example):

No. of Chocolates TU MU Observation

1 10 10 MU = TU (first unit)

2 18 8 MU positive, TU increases

3 24 6 MU positive, TU increases

4 24 0 (zero) POINT OF SATIETY — TU maximum

5 22 -2 MU negative → Disutility

6 22 0 MU goes on diminishing at satiety

RELATIONSHIP BETWEEN TU AND MU:
• When MU is positive → TU increases (going up).

• When MU is zero → TU is at its maximum (Point of Satiety / Point of Saturation).

• When MU is negative (Disutility) → TU decreases/falls.

• TU and MU both start at the same point.

• TU curve is inverted U-shape; MU curve is downward sloping.

■ REMEMBER: TU max when MU = 0. TU falls when MU < 0. This relationship is THE most tested concept.
 5. LAW OF DIMINISHING MARGINAL UTILITY (DMU) (Mar '25, Aug '24, Mar '20)

ORIGIN / HISTORY:
• First proposed by Prof. Gossen in 1854 → called Gossen's First Law.

• Later discussed by Prof. Alfred Marshall in Principles of Economics in 1890.

• The law is universal in character — based on common consumer behaviour.

STATEMENT OF THE LAW (Write word-for-word in exams):

"Other things remaining constant, the additional benefit which a person derives from a given
increase in his stock of a thing, diminishes with every increase in the stock that he already has."

— Prof. Alfred Marshall

EXPLANATION (4 points):
• When a person consumes the 1st unit, MU is 10 (highest).

• As consumption increases, MU keeps on decreasing from 10 → 8 → 6 → 4 → 2.

• When the 6th unit is consumed, MU becomes zero → Point of Maximum Satisfaction / Satiety.

• When the 7th unit is consumed, MU becomes negative (-2) → this is called negative utility/disutility.

• Therefore: the more of a thing you have, the less you want more of it.

ASSUMPTIONS OF THE LAW:

ASSUMPTION MEANING

1. Rationality Consumer is rational; tries to maximise satisfaction.

2. Cardinal Measurement Utility can be measured in numerical terms (utils).

3. Homogeneity All units of commodity are uniform — same shape, size, colour, taste, smell etc.

4. Continuity All units consumed in quick succession without any time gap.

5. Reasonability Units consumed are neither very small nor very big. E.g.: Thirsty person consumes water in a standard
glass.

6. Constancy Other factors like income, tastes, habits of consumer remain constant.

7. Divisibility Commodity is divisible into small units.

8. Single Want Consumer uses commodity to satisfy only one want at a time.

■ EXAM TIP: Remember assumptions as: R-C-H-C-R-C-D-S (Rationality, Cardinal, Homo, Continuity, Reasonability,
Constancy, Divisibility, Single want)

6. EXCEPTIONS / APPARENT EXCEPTIONS OF LAW OF DMU (July '22)

EXCEPTION EXPLANATION WHY APPARENT?

1. HOBBIES A person having hobby of collecting old coins, artefacts, Assumption of HOMOGENEITY is violated (same
paintings → gets more pleasure as collection increases. coins/items not collected) and RATIONALITY is also
MU keeps on increasing. violated.

2. MISER A miser wants to accumulate more and more wealth and Assumption of RATIONALITY is violated and it
does not want to spend it. MU of money keeps contradicts the law of DMU. Not a real exception.
increasing.
 3. ADDICTIONS MU of alcohol keeps increasing for a drunkard as he Assumption of RATIONALITY is violated. Not a real
consumes more. Applies to all addicts. exception as the law is for rational consumers.

4. POWER A person who has power wants to get more power. MU Assumption of rationality is violated. Not a real
of power keeps increasing as stock increases. exception.

5. MONEY MU of money never becomes zero. In fact, the MU of Money is used as medium of exchange → MU
money keeps increasing as stock increases. cannot be real exception for the basic law
assumptions.

■ All these are APPARENT (not real) exceptions because they violate one or more ASSUMPTIONS of the law.
 7. CRITICISMS / LIMITATIONS OF LAW OF DMU (Mar '23)

• 1. Unrealistic Assumptions: Assumptions like homogeneity, rationality, constancy, continuity are impractical and
unrealistic in nature.

• 2. Cardinal Measurement: Utility is a psychological concept. It cannot be expressed cardinally (in numerical terms) — it
is not practically possible.

• 3. Indivisible Goods: MU can be calculated only when two or more units of a commodity are consumed successively.
E.g.: Laptop, TV, mobile, house — the law is not applicable to such indivisible goods.

• 4. Constant Marginal Utility of Money: MU of each unit of money differs from person to person. It is influenced by
changes in prices, stock of money. Critics argue that money's MU is not constant.

• 5. Single Want: Law assumes one commodity used to satisfy a single want. However, in reality, money differs from
person to person and is used for various economic requirements.

■ EXAM TIP: For 'any four criticisms' — always include: unrealistic assumptions, cardinal measurement, indivisible
goods, and constant MU of money.

8. IMPORTANCE / SIGNIFICANCE OF LAW OF DMU

• 1. Usefulness to Consumers: Consumer diversifies his satisfaction. MU is acquired from a commodity is equal to price.
Consumer always maximises satisfaction.

• 2. Usefulness to Government: Helps government frame various policies like progressive tax policy (MU of money is
more for rich people), pricing policy, etc.

• 3. Basis of Law of Demand: The law helps explain why demand curve is downward sloping — as consumption
increases, MU falls, so consumer is willing to pay less.

• 4. Basis of Paradox of Values: Explains difference between value-in-use and value-in-exchange. E.g.: Water has high
value-in-use but low value-in-exchange. Gold has low value-in-use but high value-in-exchange.

9. RELATIONSHIP BETWEEN MU AND PRICE / LAW OF DEMAND

KEY CONCEPT: MU in terms of money vs Market Price

• To compare MU with market price: MU (in money) = MU per unit of x ÷ Market Price per unit of x × ■60

• A rational consumer starts buying commodity x and stops when MU = Market Price (Equilibrium).

• For 1st unit: MU in money = 100 > ■60 → consumer buys.

• For 2nd unit: MU = 80 > ■60 → consumer buys.

• For 3rd unit: MU = 60 = ■60 → EQUILIBRIUM (consumer stops buying).

• For 4th unit: MU = 40 < ■60 → consumer will NOT buy.

SITUATION CALLED AS SYMBOLIC

MU > Market Price Extra-marginal units / Consumer surplus zone MU_x > P_x

MU = Market Price Marginal unit / Consumer equilibrium MU_x = P_x

MU < Market Price Intra-marginal units (not worth buying) MU_x < P_x

■ REMEMBER: Consumer equilibrium = MU = Price. This forms the basis of Law of Demand (downward slope).
10. QUICK REVISION — KEYWORDS & ONE-LINERS

KEYWORD / CONCEPT ONE-LINE ANSWER

Utility Want-satisfying power of a commodity.

Who introduced utility? Dr. Alfred Marshall, 1890, Principles of Economics.

Unit of utility UTIL (Cardinal Utility Approach).

Utility ≠ Usefulness Alcohol has utility but is not useful. Gun has utility but ethically bad.

Total Utility (TU) Sum of all marginal utilities from all units consumed.

Marginal Utility (MU) Additional utility from consuming one extra unit.

MU formula MU_n = TU_n – TU_(n-1)

Point of Satiety When TU is maximum and MU = 0.

Disutility When MU becomes negative (–ve), TU starts falling.

Who proposed DMU? First: Prof. Gossen (1854). Later: Prof. Alfred Marshall (1890).

DMU statement "Other things remaining constant, additional benefit diminishes with every increase in stock."
— Marshall

Gossen's First Law Another name for Law of DMU.

Cardinal Measurement Utility can be expressed numerically. Assumption of DMU.

Paradox of Values Water = high value-in-use, low value-in-exchange. Gold = opposite.

Consumer Equilibrium MU = Market Price. Consumer will stop buying at this point.

Basis of Law of Demand As MU falls, consumer pays less → demand curve slopes downward.

Apparent Exceptions Hobbies, Miser, Addictions, Power, Money — all violate RATIONALITY.

11. ILLUSTRATION-BASED CONCEPTS (Identify & Explain)

Q: Laila satisfied her want of writing an essay by using pen and notebook.

Ans: Concept: Utility. Pen and notebook are used by Laila to satisfy her want. Utility = want-satisfying power of a commodity.

Q: Salma purchased a sweater for her father in winter season.

Ans: Concept: Time Utility. Utility of a commodity increases with change in its time of utilisation.

Q: Nilesh purchased ornaments for his sister.

Ans: Concept: Value in exchange / Possession utility. Explains paradox of value — commodities have high value in
exchange but no value in use.

Q: Dilip purchased his dream house in his village.

Ans: Concept: Possession Utility. Ownership transferred from shop owner to Dilip.

Q: Engineering students rush to Xerox centre when exams are approaching.

Ans: Concept: Time Utility. Utility of friends' notes increases as exams approach.

Q: Kavita consumed five units of oranges one after the other.

Ans: Concept: Continuity (Assumption of DMU). Units are consumed in quick succession — assumption of continuity.
 Q: Bhushan refused to eat fifth chapati after eating four chapatis.

Ans: Concept: Point of Satiety / Negative MU (Disutility). TU is maximum and MU = 0. Additional unit would result in
disutility.

Q: Venky purchased a pack of 3 shirts for ■599.

Ans: Concept: Consumer Equilibrium / Marginal Unit. MU becomes equal to market price. Venky gets maximum value for
money.

■ EXAM TIP: Illustration questions: Always write CONCEPT NAME first, then explain with 2–3 lines. Don't skip the
concept name — it's worth marks!

12. DIAGRAM EXPLANATION NOTES

• X-axis = No. of units consumed. Y-axis = Total and Marginal Utility.

• TU and MU curves begin at the same point.

• TU curve increases at a decreasing rate while MU curve diminishes with additional units.

• At the point of satiety: TU is at its maximum; MU curve touches the X-axis (MU = 0).

• After the point of satiety: person experiences dis-satisfaction / disutility. TU becomes negative and MU curve slopes
downwards below X-axis.

• MU curve is a downward sloping curve from left to right — this IS the MU Curve Diagram.

• Point D on MU curve = Disutility region (MU negative).

■ REMEMBER: Always LABEL your diagrams: X-axis, Y-axis, TU Curve, MU Curve, Point of Satiety, Dis-utility
region. Missing labels = lost marks!

13. FINAL EXAM STRATEGY — HOW TO SCORE 100/100

Q TYPE STRATEGY KEY POINTS TO INCLUDE

Features of Utility (4 Write 4 features with definition + example each. Relative, Subjective, Ethically neutral,
marks) Utility≠Usefulness, Hypothetical.

Types of Utility (4 marks) Write any 4 types with meaning + example. Form, Place, Time, Service, Knowledge,
Possession.

State Law of DMU (6–8 Origin → Statement (exact) → Explanation → Marshall quote word-for-word, Gossen 1854,
marks) Schedule → Assumptions → Diagram. Schedule, MU curve diagram.

Exceptions of DMU (4 Write 4–5 exceptions. Always add 'why apparent' for Hobbies, Miser, Addictions, Power, Money. All
marks) each. violate rationality.

Criticisms of DMU (4 Write any 4 limitations clearly. Unrealistic assumptions, cardinal measurement,
marks) indivisible goods, MU of money.

TU & MU concepts (4 Define both, give formula, give schedule, explain MU_n = TU_n – TU_(n-1). Point of satiety. TU max
marks) relationship. when MU=0.

Illustration Q (2–3 marks) Name concept first, then explain with 2 lines. Never skip writing the concept/term name!

■ ALL THE BEST! Study smart, write neatly, label diagrams, quote Marshall — you've got 100/100! ■